KPIs and budgets: how to read the numbers in your own accounts

The terms behind it, briefly explained

Finally a quick glossary of the terms from this article — brief and concrete, the way we explain them to our customers.

What is nøgletal (financial ratios)?

Nøgletal are calculated figures that make accounts easier to judge — profit margin, solvency ratio, liquidity ratio, return on assets. They show earnings, resilience and ability to pay.

Ratios are most useful in comparison — against previous years or the industry. Banks and investors typically look at solvency and earnings when assessing a business.

What is bruttofortjeneste (gross profit)?

Bruttofortjeneste is revenue minus the direct costs of delivering the product or service — cost of goods, subcontractors. It shows what is left to cover salaries and fixed costs.

In many Danish annual reports gross profit is the top line, because smaller companies may combine revenue and cost of goods for competitive reasons. As a percentage of revenue it is the gross margin.

What is dækningsbidrag (contribution margin)?

Dækningsbidrag is revenue minus variable costs. It shows what a product or an order contributes towards covering the business's fixed costs.

The contribution margin is used for pricing and for judging which products actually make money. As a percentage of revenue it is the contribution ratio. When total contribution exceeds fixed costs, the business is profitable.

What is soliditetsgrad (solvency ratio)?

The soliditetsgrad shows how much of the business's assets are financed with equity. It is calculated as equity divided by total assets times 100.

A solvency ratio of 30-40% or more is normally considered solid, though it varies by industry. The higher the solvency, the better the business withstands losses — and the easier it usually is to borrow.

What is årets resultat (profit for the year)?

Årets resultat is the bottom line of the income statement: all the year's income minus all costs, interest and tax. Positive means profit, negative means loss.

The result is transferred to equity on the balance sheet. In a company, the general meeting decides whether profit is paid out as dividends or retained; losses can be carried forward against future profits.

What is driftsomkostninger (operating costs)?

Driftsomkostninger are the costs incurred to earn, secure and maintain the business's income — rent, phone, software, marketing, salaries.

Precisely because they are necessary for operations, operating costs are tax deductible. Private expenses are not — and mixed expenses must be split. Always keep the receipt as documentation.

What is faste omkostninger (fixed costs)?

Faste omkostninger are costs that do not vary with activity — rent, insurance, subscriptions, fixed salaries. They must be paid no matter how much you sell.

Fixed costs determine the minimum contribution margin the business must earn to break even. Low fixed costs make a business more flexible in bad times.

What is variable omkostninger (variable costs)?

Variable omkostninger are costs that rise and fall with sales — cost of goods, materials, freight, transaction fees. Sell nothing, and they are close to zero.

The split between variable and fixed costs drives contribution accounting: revenue minus variable costs gives the contribution margin, which must cover fixed costs before any profit remains.

What is a budget?

A budget is a plan for the business's expected income and expenses over a coming period — typically a year. It is used to steer the finances and catch deviations early.

The most common budgets are the operating budget (the result), the cash-flow budget (the money) and the start-up budget. Banks usually ask for budgets when you apply for financing.

What is a likviditetsbudget (cash-flow budget)?

A likviditetsbudget shows expected payments in and out month by month — and thus whether there is enough money in the account all year.

A business can be profitable on paper and still run out of cash, for instance when VAT, tax or big bills fall due. The cash-flow budget reveals the gaps ahead of time, so you can act before they hit.

What is a pengestrømsopgørelse (cash flow statement)?

A pengestrømsopgørelse shows the year's actual payments in and out, split into operations, investments and financing. It explains why the cash position changed.

Where the income statement shows earnings, the cash flow statement shows liquidity — and the difference can be large, with long payment terms or big investments. Only larger companies (reporting classes C and D) are required to prepare one.

What is anlægsaktiver (fixed assets)?

Anlægsaktiver are assets held for lasting use — machinery, cars, fixtures, property, software. They sit on the balance sheet and are typically depreciated over several years.

Fixed assets split into tangible (physical things), intangible (goodwill, software) and financial (shares in other companies). The counterpart is current assets, which turn over continuously in operations.

What is omsætningsaktiver (current assets)?

Omsætningsaktiver are assets that turn over in day-to-day operations — typically inventory, customer receivables and cash in the bank. They are expected to convert to cash within a year.

Together with fixed assets they make up the asset side of the balance sheet. Plenty of current assets relative to short-term debt means good ability to pay — measured with ratios like the liquidity ratio.

What is immaterielle aktiver (intangible assets)?

Immaterielle aktiver are assets without physical form — goodwill, patents, trademarks, licences, development projects. They are recognised on the balance sheet and amortised over their useful life.

Intangibles typically arise when buying a business (goodwill) or from in-house development projects. The rules for when they may be capitalised rather than expensed are stricter than for physical assets.

What is goodwill?

Goodwill is the premium a buyer pays for a business beyond the value of its assets minus debt. It covers the customer base, reputation and earning power.

Goodwill only appears in the accounts when it has been bought — internally generated goodwill is not recognised. Purchased goodwill is amortised over its useful life, often up to 10 years, and over 7 years for tax.

What is a varelager (inventory)?

A varelager is the goods a business has bought or produced but not yet sold. Inventory is a current asset on the balance sheet and affects profit through the cost of goods sold.

At year-end the inventory is valued — typically at cost. Only goods actually sold (the cost of goods sold) may be expensed; the rest stays on the balance sheet as an asset until sold.

What is hensættelser (provisions)?

Hensættelser are amounts set aside for obligations that are likely but uncertain in amount or timing — warranty work, lawsuits or deferred tax, for example.

A provision hits the result as soon as the obligation arises — not when the bill is eventually paid. It sits on the liabilities side between equity and debt, and is released or adjusted once the matter is settled.