5 Key Financial Metrics Every Business Should Be Tracking Right Now
5 Key Financial Metrics Every Business Should Be Tracking Right Now
1. Cash Flow
Cash flow refers to the movement of money in and out of your business. Tracking cash flow is critical for understanding whether your business can pay its bills, invest in new opportunities, or handle unexpected costs. It’s the lifeblood of your business, as you can’t survive without cash.
Why it matters:
Even if your business is profitable on paper, poor cash flow can lead to issues. If you don’t have enough cash to cover operational expenses, you might need to borrow, delay payments, or even risk shutting down.
How to track it:
- Start with your incoming cash, which comes from sales and other business activities.
- Subtract your outgoing cash, which includes costs like rent, utilities, salaries, and supplies.
- The difference gives you your cash flow.
You want to aim for positive cash flow, but the reality is that businesses often go through cash flow cycles. Keeping a close eye on this metric helps you avoid a surprise cash shortage.
2. Gross Profit Margin
Your gross profit margin tells you how much profit you're making on your products or services before any other expenses are accounted for. It's calculated by subtracting the cost of goods sold (COGS) from your revenue and then dividing that number by your revenue.
Why it matters:
If your gross margin is low, it means that your costs are eating into your profits. A healthy gross margin shows that you're able to keep a good portion of your revenue after covering the cost of your products or services. It’s an indicator of pricing, production efficiency, and cost management.
How to track it:
- Take your total revenue and subtract the cost of goods sold (COGS).
- Divide that number by your total revenue and multiply by 100 to get a percentage.
A gross profit margin percentage of around 50% is considered strong, though it varies by industry.
3. Net Profit Margin
Net profit margin shows how much of your revenue turns into actual profit after all expenses are accounted for, including operating costs, taxes, and interest. It’s a broader metric than the gross profit margin, offering a full picture of your business’s profitability.
Why it matters:
If your net profit margin is low, it might signal that you're overspending in certain areas or that your pricing strategy isn’t effective. A high net profit margin, on the other hand, shows that your business is efficiently managing its expenses and maximizing its revenue.
How to track it:
- Subtract all your expenses (including operating expenses, taxes, and interest) from your total revenue.
- Divide the result by your total revenue and multiply by 100 to get a percentage.
This metric helps you understand the bottom line. Aim for a consistent or growing net profit margin over time.
4. Accounts Receivable Turnover
Accounts receivable turnover tracks how quickly your business collects payments from customers. The faster you can collect your receivables, the healthier your cash flow will be. If you have a slow turnover, it could indicate problems with customer payment terms or collection practices.
Why it matters:
A high turnover rate suggests that your customers are paying quickly and you’re not holding onto receivables for too long. A low turnover rate means that you might be struggling to collect payments, which could negatively affect your cash flow and overall business health.
How to track it:
- Divide your net credit sales (sales made on credit) by the average accounts receivable balance.
- The result will give you the turnover rate.
A higher rate is better, but this can vary by industry. For businesses that deal with large accounts, a longer payment cycle might be normal.
5. Current Ratio
The current ratio is a measure of your business’s ability to pay its short-term liabilities with its short-term assets. It’s an important metric for understanding whether you have enough liquidity to meet immediate financial obligations, like paying bills, salaries, and suppliers.
Why it matters:
A ratio below 1 means that you don’t have enough assets to cover your short-term liabilities, which could be a sign of financial instability. A ratio above 1 suggests that your business has enough liquidity, but a very high ratio may indicate that you’re not investing your assets efficiently.
How to track it:
- Divide your current assets (like cash, accounts receivable, and inventory) by your current liabilities (like accounts payable and short-term debt).
- The result gives you the current ratio.
Ideally, aim for a ratio between 1.5 and 3. Too high or too low could mean you’re either not using your resources effectively or are too close to financial trouble.
Conclusion
These five metrics are essential for understanding the financial health of your business. While every business is different, monitoring these regularly can provide you with clear insights into where you stand financially and where you need to improve. Whether you’re focused on cash flow to ensure day-to-day operations or net profit margin to understand profitability, these numbers will help guide your decisions and keep your business on track.
Track them well, and you’ll make smarter decisions, avoid surprises, and strengthen your business's financial position.