Financial metrics and key performance indicators (KPIs) can help you improve your decision-making processes and your chances of success by providing valuable insight into your business’s health. Some financial metrics may be more critical for your business than others. However, there are certain metrics that every business leader should know. Here’s a list of 10 financial metrics that every business should track:
1. Revenue
Revenue is the total amount of money your business earns from selling goods or services during a given time. A driving force for any business is its ability to generate sales. When you track this metric, you can see whether your business is growing, declining, or staying stagnant over time. You can further break down revenue into different types (recurring vs non-recurring) and dive into sales specific to certain products or services to gain even more insights.
2. Revenue Growth Rate
Revenue growth rate is another one of the important financial metrics for your business. This metric compares revenue from one year to the next in order to show how quickly your business is growing. This helps you predict future performance. You can also easily adjust this metric to track monthly or quarterly growth rates for more timely information.
3. Gross Profit Margin
Gross profit margin is the money your business has left over from revenue after subtracting the direct costs of producing your business’s goods or services. To find this metric, divide gross profit by revenue. This financial metric is something you can actively control by adjusting your workforce, changing suppliers, etc.
4. Operating Cash Flow
Operating cash flow is the cash left over after paying all your fixed expenses such as rent, utilities, and payroll. This cash gets to stay in the business. This financial metric shows how much your business can afford to absorb other expenses. Lenders will use operating cash flow to determine whether your business can afford to repay a loan.
5. Accounts Receivable Turnover
Accounts receivable turnover shows how quickly customers are paying your business and provides insight into your cash flow. When you receive payments from customers faster, you have more cash on hand for business activities. Even with strong sales, if you’re not collecting payment from customers in a timely manner, you may struggle to pay bills, make loan payments, etc.
6. Debt-to-Equity Ratio
Another one of the important financial metrics for businesses is the debt-to-equity ratio. This metric measures how much a business finances itself using debt versus equity. A lower ratio is typically better. It shows that more of your business is financed by owner investment than debt, and it proves that business owners are highly invested in the company and its stability.
7. Debt Service Coverage Ratio
Debt service coverage ratio, or DSCR, compares operating income to debt payments. This financial metric demonstrates whether your business is generating enough cash to cover loan payments. This is especially important when determining whether you can afford to take on additional debt. A higher ratio is better.
8. Accounts Payable Days Outstanding
This financial metric is the flip side of accounts receivable turnover. Accounts payable days outstanding measures how long it takes your business to pay its suppliers. If you are slow to collect from customers but quickly pay suppliers, you may experience cash flow issues. It’s important to be able to pay suppliers on time, but stretching out payments within reason can free up cash for other needs.
9. Inventory Turnover Ratio
Inventory turnover ratio is a financial metric that shows how quickly your business is selling and replacing inventory. A higher inventory turnover ratio means you are selling products quickly, which is typically good and shows good inventory management. A lower ratio means you are selling products slowly, which could keep your cash tied up.
10. Quick Ratio
One of the financial metrics that every business should track is the quick ratio. This metric compares your quick assets (those that can be converted into cash within 90 days, such as cash and accounts receivable) to short-term liabilities, such as upcoming loan payments, payroll, and taxes. This ratio tells you if you have enough current assets to cover your current liabilities.
You don’t need to be an expert in finance to run a successful business. If you want help understanding your financial standing in an easier way, you can benefit from our CFO Scoreboard. Take control of your money today so you can maximize your business’s assets, profits, and cash flow.
