The Numbers that Matter Most: How to Keep Your Organization Healthy


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Thursday, August 27, 2020

Keep an eye on the metrics that matter most in order to clearly assess the health of your finances.

Article 4 Minutes
The Numbers that Matter Most: How to Keep Your Organization Healthy

A popular quote in business circles: “what gets measured gets managed”. In other words, in order to manage any aspect of an organization, it’s necessary to utilize metrics and data to fully understand it. This is especially important when it comes to financial matters.

Of course, the other side of that coin is measuring and managing everything, even aspects of a business that need little to no oversight, which can cause more harm than good. Successful companies must ascertain which numbers are the most important, particularly when it comes to organizational health.

This can be something that’s particularly hard to measure. For example, when looking for growth there are plenty of obvious metrics that businesses will be looking to increase. However, maintaining organizational health requires a narrower focus on several crucial numbers, each of which reveals something important about the state of a company.

McKinsey has repeatedly observed that organizational health is one of the strongest indicators of overall success, especially in terms of shareholder returns, but in order to manage this, it needs to be measured.

Liquidity: looking at the short term

“Before a company can prosper in the long term, it must first be able to survive in the short term.” - Investopedia


The key measure of short-term survivability is liquidity; a metric indicating the amount of spendable money - including assets that can easily be converted into cash - that can be used to manage immediate debts.

Measuring liquidity is usually done in one of two ways.

1. Current ratio

The first is the simplest: the current ratio. This is calculated by dividing an organization’s current assets - cash and anything that can be converted to cash within 12 months - by its current liabilities, which are any financial obligations that need paying within 12 months.

Current ratio formula

2. Quick ratio

A more accurate option is the quick ratio, which is calculated by taking the value of an organization’s inventory and its prepaid expenses away from its current assets. This figure is then divided by its current liabilities. In both cases, a result below one is troubling. Ideally, a healthy organization will aim for a ratio above 1.5.

Quick ratio formula

Solvency: looking at the long term

While liquidity measures an organization’s ability to pay off its debts in the short term, solvency is focused firmly on the long term. This metric changes more slowly than liquidity, but it also varies a lot between industries, so businesses will need to do some research to understand what number they should be aiming for in their particular sector.

3. Solvency ratio

To get a simple indicator of solvency, a company’s total liabilities can be divided by its total assets. However, the most common metric used in this area is the solvency ratio, which is calculated by adding an organization’s net income (after tax) to its non-cash expenses, and dividing the result by its total liabilities.

Solvency ratio formula

The result can be expressed as a decimal, but it can be a good idea to convert it into a percentage. This can then be thought of as the percentage of an operation that is actually owned by its operator, giving a good indication of how healthy it is overall.

How to measure efficiency

To gain a fuller understanding of a organization’s health, it’s necessary to look at its efficiency. This measures how well an organization is using its resources in order to generate profit and is the basic function of a company, making this one of the most important metrics available.

How you measure this will vary depending on what type of business you are.

4. Inventory turnover ratio

For example, for a business that sells physical goods to customers, an important measurement is its inventory turnover ratio, calculated by dividing the cost of goods sold by the average inventory over a given period. The higher the number, the better the organization is at producing the right amount of product to meet customer demand.

Inventory turnover ratio formula

5. Receivables turnover ratio

For service-based businesses, it might be better to use the receivables turnover ratio. To calculate this for a given period, take the net credit sales for this date range and divide them by the average accounts receivable for the same period. The result will give an indication of how efficient a company is at collecting money owed to it; the higher the result, the more healthy the business could be seen to be overall.

Receivables turnover ratio formula

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