Debitoor Dictionary

Accounting terms explained in a simple way

Over 150 Articles for Founders and Entrepreneurs

  1. Annual report
  2. Average Cost
  3. Accounts payable
  4. Accounts receivable
  5. Revenues
  6. Accounting year

Key figure - What is a key figure?

Key figures are financial calculations that are used to analyse a company's affairs and condition

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Key figures give meaningful insight into the financial situation of a company at the end of each accounting year. Because each business is different, and certain field differ drastically, it's important to keep the type of company in mind.

In this way, you can compare the final result with other businesses in the same field and with similar structures, making it easier to evaluate whether it has been a good or bad accounting year for the company.

If the company has operated for several continuous accounting years, you can compare the current year to these years in order to establish positive or negative development trends.

There are many useful key figures. We’ve outlined a few below:

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Return on equity and on capital employed

The return on equity measures how much interest the capital employed (the money invested in operating the business) carries. The return on capital employed calculates whether the company profits from said capital.

If the return on equity is less than the return on capital employed, it means that the company suffers a loss from its loan capital. If the return on equity is greater than the return on capital employed, the company profits from its loan capital.

Formulas:

Return on capital employed:

Return before tax and financing charges/net assets (capital employed) X 100

Return on equity:

Return after tax and financing charges/equity X 100

The profit margin

The profit margin is calculated by determining the profit as a percentage of the revenues. It reveals whether a company is good at adjusting its costs in respect to its income.

A large profit margin shows that the company is effective at keeping its costs at a minimum, which results in better profits.

Formula: Return before tax and financing charges/revenue X 100

The contribution margin

The contribution margin allows a company to see whether the remaining revenues can cover the fixed costs. If the contribution margin is high, the company has had few variable costs (costs that change with changes to the service or product).

However, if the margin is low, this indicates that the company has experienced many variable costs.

Change in the contribution margin can be caused by a change in sales prices or changes in how the products are produced.

Formula: Contribution margin/revenue X 100

Customer and supplier turnover ratios

The customer turnover ratio (also known as the accounts receivable ratio) measures how quickly a company’s customers pay their invoices. If a customer’s turnover ratio is high, it means they pay off each invoice fast; their credit period is short.

The supplier turnover ratio (accounts payable ratio) reveals how long a credit period is offered to the company by its suppliers. The lower the ratio, the longer the company has to pay off the amount invoiced by the supplier.

Formulas:

Customer turnover ratio:

360/(Revenue/customers) = number of days

Supplier turnover ratio:

360/(Purchased products/suppliers) = number of days

Solvency ratio and break-even sales

The solvency ratio illustrates a company's ability to handle a loss. It measures the percentage of capital a company can lose before the loan capital is affected. A high solvency ratio means that the company is able to bear large losses without getting into financial problems.

Break-even sales is the minimum income a company must earn in the course of a year in order to achieve a zero-profit result.

Formulas:

Solvency ratio: Equity/total assets X 100

Break-even sales: Capacity costs/contribution ratio X 100

*We always encourage you to contact your accountant for more details on dealing with key figures.

Key figures and Debitoor

Debitoor’s accounting functions aim to make the life of a freelancer or small business owner easier.

Each time you update your account by entering payment on an invoice or recording an expense, the totals are automatically updated in your accounts, making it easy to keep track of your company’s financial situation.

This means: no need to calculate them yourself using complex formulas.