Mind Your Business - Financial Metrics Every Business Owner Should Monitor
As a business owner, understanding your financial health is essential to making informed decisions and steering your business toward success. While reviewing financial statements is a good start, focusing on specific metrics provides deeper insights into your company’s performance and success for the future.
Below are key financial metrics you should monitor periodically, to ensure that you are on the path to achieving business growth:
Gross Margin is the percentage of revenue remaining after deducting the cost of goods sold (COGS) or direct cost of services provided.
Gross margin helps you evaluate your production efficiency and directly influences your pricing strategy.
Profit Margin is the percentage of revenue that turns into profit after covering all direct costs and general expenses.
Profit margin shows how efficiently your business converts sales into actual profit. A low margin may indicate high operating costs or pricing issues.
Operating Expense Ratio (OER) is the proportion of revenue spent on operating expenses. A high OER indicates inefficiencies in managing operational costs, which can erode profit margins.
Current Ratio is a measure of your business’s ability to cover short-term liabilities with short-term assets. A ratio above 1 indicates good liquidity. A ratio below 1 suggests potential cash flow problems.
Accounts Receivable (AR) Turnover indicates the number of times your business collects the average amounts owed by customers over a period (typically 1 year).
A high AR turnover indicates efficient collections, while low turnover may suggest lax credit policies or customer payment issues, ultimately this will adversely impact your cashflow and liquidity.
Inventory Turnover is the number of times your business sells and replaces its inventory over a period (typically 1 year). A low inventory turnover may indicate overstocking or slow sales, while high turnover reflects efficient inventory management.
Cash Flow is the net amount of cash moving in or out of your business over a specific period.
Cash coming in is “positive” cash flow and this ensures your business can cover expenses, reinvest, and stay operational. Cash moving out is “negative” cash flow signals potential liquidity issues.
Debt-to-Equity (D/E) Ratio measures the proportion of your business’s financing that comes from debt/credits versus owner’s equity. The D/E ratio measures financial leverage and risk.
A high ratio indicates heavy reliance on debt, which could be risky during downturns. This could also result in the business going bankrupt.
Customer Acquisition Cost (CAC) is the cost of acquiring a new customer. Monitoring your CAC helps you assess the effectiveness of your marketing and sales strategies. A high CAC relative to customer lifetime value can hurt profitability.
Revenue Growth Rate is the percentage increase in revenue over a period. This can be compared month on month, quarter on quarter or year on year.
Revenue growth indicates whether your business is expanding or contracting. Consistent growth is a positive sign of overall health.
Return on Assets (ROA) ratio is a key metric used to measure how efficiently a company is using its assets to generate revenue or profits. It is an indication of the profitability of the business relative to its total assets. A higher ROA indicates that a company is more effectively and efficiently utilizing its assets to generate earnings/profts.
Regularly tracking and analyzing these indicators will:
provide actionable insights into your business’s performance and ensure financial stability.
help you make informed business decisions, identify trends, and proactively address potential issues.
Click below to access our downloadable Cheat Sheet that summarizes each metric and explains how it is calculated.
