Purpose
To give you/remind you about the key financial metrics to monitor for business consistently and to get you to think about what is most important to you.
Introduction
In-order to ensure the success and growth of your business, it is crucial to regularly monitor your financial metrics. Understanding the financial health of your business is essential for making informed decisions and plans. However, with so many financial metrics available, it can be overwhelming to know which ones to prioritize. In this blog, we will highlight the most important financial metrics to monitor for your business.
The most important financial metrics to track in your business are:
Let’s start by covering off the most important financial metrics which apply to all businesses.
I believe the top two financial metrics all businesses must measure are:
1. Profit – Gross and Net (definitions below if you need reminding)
2. Cash flow – The amount of cashing coming into and going out of businesses.
I’ve not mentioned Revenue, Turnover or Sales yet – why is that? It’s simply because making Profit is more important than Revenue. Yes of course you need to know Revenue in-order to calculate Profit so it’s an important KPI to track.
The second in my list is cash flow, but they are joint first really – as cash is the fuel for business. A business without cash is like a car without fuel/electricity!
Revenue is vanity, Profit is sanity and cash in King or Queen
So, for the majority the above is not new news – still ask yourself how well you are tracking Profit and cash in a proactive way that allows your business to adapt?
What might you do differently / better / more consistently?
Here is a more comprehensive list of the key financial KPIs to track:
1. Gross Profit Margin:
Gross Profit Margin is the percentage of revenue that remains after deducting the cost of goods sold (or cost to service). This metric is important because it reflects the profitability of your business, and is a good way to determine if your pricing strategy is effective and what products/services to focus on,
Join the NoLimits Business Community
Are you a business owner looking to take your business to the next level? Join our innovative community of like-minded professionals and gain access to a wealth of valuable resources, including a community portal to chat with other business owners, ebooks, business development software, and growth events that will transform the way you do business. Best of all, these resources are completely free and will be available to you forever.
But the benefits of joining our NoLimits business community don’t stop there. By becoming part of our community, you’ll have the opportunity to connect with other business owners, share insights and ideas, and build valuable relationships that will help your business thrive. Don’t miss out on this amazing opportunity to supercharge your business and join us today!
2. Net Profit Margin:
Net Profit Margin is the percentage of revenue that remains after deducting all expenses, including taxes. This metric provides insight into how efficiently your business is operating and how much profit you are making.
3. Revenue:
Revenue is the total amount of money your business earns from sales, services, and any other sources of income. It is the foundation for all financial metrics and is a key indicator of how well your business is performing top line.
4. Cash Flow:
Cash Flow is the amount of cash that flows in and out of your business during a specific period. It is an essential metric because it reflects the liquidity of your business and determines your ability to pay bills, invest in new projects, and grow your business.
5. Accounts Receivable (AR) Turnover Ratio:
The accounts receivable turnover ratio is used in business accounting to quantify how well companies are managing the credit that they extend to their customers by evaluating how long it takes to collect the outstanding debt throughout the accounting period. The AR Turnover Ratio is calculated by dividing net sales by average account receivables. If this sounds too complex, start by knowing how quickly your invoices are being paid!
6. Inventory Turnover:
Inventory Turnover is the number of times you sell and replace your average inventory during a specific period. This metric is important because it reflects how effectively you are managing your inventory and whether you have too much or too little stock. This is more relevant to businesses with stock rather than those that sell services – remember that you don’t make profit until the stock is sold!
7. Debt-to-Equity Ratio:
Debt-to-Equity Ratio is the amount of debt your business has compared to the amount of equity. This metric is important because it reflects your business’s ability to pay off its debts and shows how much of your business is financed by debt versus equity.
In conclusion, proactively monitoring your financial metrics is essential for the success and growth of your business. The above-listed metrics are the most important ones to monitor regularly. By keeping a close eye on these metrics, you can make informed decisions, adjust your strategies, and ensure the long-term success of your business.
What is missing?
One of the metrics that so often gets overlooked in my experience by SME owners is time!
There are many reasons why measuring time is in my mind critical:
- Efficiency: Measuring your time can help you identify tasks that take up too much of your/your teams time, allowing you to find ways to streamline and become more efficient. You can then focus on more critical tasks that require your attention. You can combine this with the financial metrics above such as Gross profit per hour? Know that and you are sure to drive some positive decisions for your business.
- Time management: A business owners we often juggle multiple tasks and responsibilities. Measuring your time helps you better understand how you spend your time, enabling you to prioritize your tasks and manage your time more effectively. Ask yourself how well is you time being spent to generate profit or cash?
- Accountability: Measuring your time provides a level of accountability, helping you ensure that you are making progress towards your goals. You can identify areas where you are not utilizing your time effectively and adjust your approach accordingly. This can be linked to the key metrics above – after all if you are wasting time on things that don’t generate profit, this is likely to impede your growth potential.
- Work-life balance: Business owners often find it challenging to balance work and personal life. Measuring your time helps you identify areas where you are spending too much time working and not enough time on personal activities. This can help you achieve a better work-life balance, which is essential for your well-being and the success of your business. So aligned to financial goals, what could you do differently to improve your work-life balance? Or a question I really like what is your time really work? Think on that one…
Conclusion
Let’s end with three questions:
- How can I better proactively track profit and cash flow in my business?
- What key financial metrics am I missing from my business performance dashboard and action to address?
- How do you value time in your business/incorporate it into your tracking and decision making?
Action
What specific actions are you going to take to improve how you proactively track and inform decision making in your business?
Please share your comments & questions.
By James Gentle
Join the NoLimits Business Community
Are you a business owner looking to take your business to the next level? Join our innovative community of like-minded professionals and gain access to a wealth of valuable resources, including a community portal to chat with other business owners, ebooks, business development software, and growth events that will transform the way you do business. Best of all, these resources are completely free and will be available to you forever.
But the benefits of joining our NoLimits business community don’t stop there. By becoming part of our community, you’ll have the opportunity to connect with other business owners, share insights and ideas, and build valuable relationships that will help your business thrive. Don’t miss out on this amazing opportunity to supercharge your business and join us today!