The numbers that really matter: reading the financial statements to steer the business
Theory and practice
The balance sheet, the profit and loss account and the cash flow statement tell the story of the company: now it’s time to understand how to read them to make real decisions.
Your financial statements are not a burden: they are the real dashboard from which to start steering your company. If you still think they only serve to work out “how much tax you will pay”, you are in good company… but also quite a long way off track.
The modern business owner must be able to read the numbers. Here are 3 key indicators (KPIs) to know and interpret.
EBITDA: the heart of industrial profitability
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) measures the company’s ability to generate profit from its “pure” operating activity, excluding financial and tax factors.
Why is it so important? It removes the effect of taxes, an external variable that does not depend on business efficiency. It ignores depreciation and amortisation, which are influenced by accounting choices or past investments. It excludes interest expense, which is linked to the financial structure rather than to productivity.
E BITDA tells you whether the business machine is working or not. If your business has a low, stagnant or negative EBITDA, the problem is not the crisis: it is the operating model.
NFP / EBITDA: the thermometer of financial risk
The ratio between Net Financial Position (NFP) and EBITDA measures how many years, in theory, it would take to repay all financial debt using only the cash generated by operating activities.
Example: Net debt = €1,200,000
EBITDA = €400,000
NFP / EBITDA = 3
This means it would take 3 years of operating margin to pay off the debt.
How should you read it? < 2 → ideal situation: you are on solid ground and the bank looks on you favourably. 2 – 3.5 → manageable, but it needs constant attention.
4 → risk zone: you may have problems refinancing your debts.
Contribution margin and break-even: the operational compass
They are needed for day-to-day decisions. The unit contribution margin is the difference between the selling price and the variable costs per unit (raw materials, labour, energy). It tells you how much each product or job order contributes to covering fixed costs.
From here you calculate the break-even point, i.e. the minimum volume of production or sales needed to cover fixed costs. If you don’t know your break-even, you are doing business with your eyes closed.
Many business owners discover too late that their margins are insufficient because they look only at turnover without analysing the cost structure.
Even if it may seem complex, these indicators are within reach of any business owner who genuinely wants to take the reins of their own business. Running a business isn’t a matter of luck but of control. And control starts with the numbers. Those who can read them make sounder decisions and reduce risk.