Common Financial Metrics Every Business Owner Should Know
Understanding your business’s finances is crucial for making smart decisions and planning for the future. As a business owner, you need to regularly track and analyze key financial metrics to assess the health and performance of your company.
While there are many financial metrics you could look at, a few vital ones provide tremendous insight with relatively little effort to track. In this blog post, we will share common financial metrics every business owner should know.
9 Common Financial Metrics For Business Owners
1. Revenue
Revenue represents the amount of money your business earns from sales or services provided to customers before any expenses or other costs are taken out. Tracking both total and segmented revenue (e.g. by product line, geography etc.) over time is key to understanding sales growth and planning finances around operating expenses and production needs.
2. Gross Profit
Gross profit is calculated by subtracting the direct costs associated with generating revenue (known as cost of goods sold) from your total revenue. It reflects the leftover revenue after covering your variable costs and is an indicator of how efficiently and profitability your business operates.
3. Operating Expenses
Operating expenses include the ongoing regular expenses needed to run your business, like salaries, rent, utilities, supplies etc. Tracking operating expenses shows where your money is going and can help you budget and reduce unnecessary spending if needed. It provides key information on profitability.
4. Operating Cash Flow
A company’s operating cash flow indicates how much cash is generated from regular business operations. Unlike metrics like revenue or net profit on paper, cash flow reflects the actual money coming in and out. Positive operating cash flow means your business has enough cash to cover operational expenses.
5. Net Profit Margin
Net profit margin represents what percentage of total revenue turns into net profit after both operating and non-operating expenses are paid for. It’s a profitability ratio that allows you to quickly assess how efficient your business is at generating profit from revenues and compare against competitors.
6. Return on Investment (ROI)
ROI measures the overall profitability of investments your business has made and is expressed as a percentage. Tracking ROI over time helps you determine if recent investments like new equipment, R&D, marketing campaigns etc. are contributing to bottom line profits as expected.
7. Working Capital
Working capital refers to a company’s current assets minus current liabilities and covers the operating liquidity available. Insufficient working capital is a leading reason small businesses fail, so tracking this metric ensures your business has enough funds to cover near-term operating costs and expenses.
8. Debt-to-Equity Ratio
The debt-to-equity ratio allows you to monitor how much your company relies on debt financing versus equity financing. A higher ratio indicates increased financial risk while lower means the business is using more equity to fuel growth.
9. Customer Lifetime Value (CLV)
While less traditional, customer lifetime value helps determine the long-term value of a customer to your business over the entire time they remain a customer and make repeated transactions. Understanding your CLV per customer cohort allows you to better allocate resources towards acquiring and retaining your best customers.
Monitoring these nine financial metrics on an ongoing basis provides tremendous visibility into the overall health of your business. As opposed to vanity metrics like website visitors or app downloads that don’t always correlate to profitability, these metrics offer actionable insights.
With key financial data in hand updated regularly, you can spot unfavorable trends early and course correct quickly. You’ll gain clarity on profit drivers to refine operations. Finance metrics act as a quantitative compass that informs strategic decisions toward managing and improving your business performance over the long run.
