Question

If you were the CFO of a midsized manufacturing company, what are the five key financial indicators that you would be focused on? (For example, financial performance ratios or liquidity). Please describe each in detail, provide market data where required, provide clear industry benchmarks, and lastly please make it clear how you would base critical decisions on these five focus areas.

Answer 1

5 key financial indicators that I will be focused upon for a mid sized manufacturing companies are-

A. Liquidity ratio of the company which will include current ratio as well as quick ratio. liquidity ratio will be providing an idea about the ability of the company in able to generate a higher amount of cash in the short-term and fulfill the short-term debt repayment and reduce the risk related to cost of financial distress in short term. These short term liquidity ratios are better when they are higher according to the industry standards.

B. Inventory conversion cycle- since it is a manufacturing company it will have a large amount of inventory lying in its hands and we will have to analyse the industry conversion cycle which will be providing us with the idea about the ability of the company to convert the inventory to the sales in the quick amount of time and realise the car so it will be helpful for the company to realise the cash quickly according to the industry standards.

C. I will also be analysing the overall cash flow from all three investing as well as operating and financing activities for the company as it will be providing an ability of the company to generate the cash flow in the short-term and it will also provide estimation about cash flows related to the company in the long run so those company which has a higher amount of cash flows are often considered more sound and I will be trying to compare my company with the industry standard having a higher cash flows.

D. Profitability ratios like gross profit ratio and net profit ratio and operating profit ratio will be providing with the idea of the ability of the company to generate the profits and I will be trying to specifically maintain a higher margin of the profit for the company has it will be suitable according to the industry standards

E. Asset effectiveness utilisations are another aspect which can be important in able to find out the ability of the company to utilise the assets in an efficient and effective manner in order to produce a higher amount of service and goods and getting them sold in markets in a quicker amount of time so it will also reflect the ability of the company to extract the maximum turnover from given assets.

I would have required a higher profitability ratio along with higher liquidity ratio and higher Asset Management ratio and higher cash conversion cycle for the company as well as I would have also demanded for higher cash flows because they would have been providing me with the ability to maintain the core competitiveness the overall industry.