You may wonder, “What are financial metrics, and their importance?”
Nice question!
For your company, financial metrics are equivalent to the vital signs. They support you in keeping tabs on your development, pinpointing your areas for growth, and making wise choices. You’re doing more than just crunching statistics when you monitor these metrics; you’re guiding your company toward success.
In this blog, we let you know the ten most important financial metrics that all small businesses must consider. Our integrated platform can help you in this process. It’s whether you’re an established company trying to improve your financial strategy or a startup just getting off the ground.
Let’s delve into the 10 financial metrics!
10 Key Types of Financial Metrics To Track For Your Business
1. Revenue
Before any expenses are deducted, revenue is the complete amount of money that a firm makes from the sale of goods and services. Often referred to as sales or top-line income, revenue is an essential component of the computation for the majority of financial measures.
You can calculate revenue using the formula below:
2. Expenses
Another very common financial metric that every business usually tracks is – Expenses. All the charges required for a business to run are its expenses. A business must constantly have more income than expenses in order to be profitable.
Expenses fall into two categories
- Non-operating expenditure: These are additional indirect expenses like interest on other lending fees
- Operating expenses: These are the expenses directly related to running an organization, such as manufacturing expenses, loans, and managerial expenditures.
You can calculate expenses using the formula below:
3. Net Income (Net profit)
The amount of money that remains after deducting all costs and revenue-related taxes is known as net profit or net income. Having sufficient income to pay for all of these costs is the fundamental objective of any small firm. This is due to the possibility of debt accumulation, which eventually destroys a company, if they don’t.
You can calculate net income using the formula below:
4. Cash flow (Operating cash flow)
Cash flow is the amount of money that comes into and goes out of your business over time. Stated differently, your business has a negative cash flow when fewer funds are coming in than going out.
Operating cash flow is the quantity of money a company makes daily. You can decide whether to reduce spending or how much money your business may use now or soon by performing that calculation.
You can calculate operating cash flow using the formula below:
5. Working Capital
Working capital is another critical financial metric that every business must track. It is the difference between the current assets and liabilities.
Tracking this metric allows businesses to know about available liquidity to cover immediate expenses.
You can calculate Working capital using the formula below:
6. Accounts receivable aging
The number of days it takes for your clients to pay the invoice is known as accounts receivable aging. Credit conditions, which provide a precise deadline for payment clearing, are frequently added by businesses to invoices. Usually, businesses tend to organize the clients by the due date – immediately is 1-30 days, 31-60 days – late to see how much money is collectible from different clients and customers.
In case accounts receivable consistently run behind, it can cause a serious problem in cash flow and working capital.
7. Accounts payable aging
It is comparable to accounts receivable aging in that it examines the number of days it takes your company to pay off its debt. Accounts payable are arranged according to their due date, just like receivables are.
8. Return on Investment (ROI)
ROI is comparable to your company’s ultimate report card for investments. It indicates if you’re spending wisely or whether you’re not receiving much for your money.
ROI lets you assess the effectiveness of your activities and guides how best to deploy your resources for the greatest impact. You can assess the financial return on several expenditures to determine which course of action is best for your company.
ROI is also a critical metric for assessing the success of your product launches, marketing campaigns, and other business endeavors.
You can calculate ROI using the formula below:
9. Debt-to-Equity Ratio
The debt-to-equity ratio is a metric that illustrates the proportion of your company’s capital that comes from creditors (such as loans) against investors (like shareholders).
A high debt-to-equity ratio may indicate to investors or lenders that your company is highly indebted. It supports you as you evaluate your financial situation and decide whether to borrow more money or raise stock.
The debt-to-equity ratio is calculated using the formula:
10. Current Ratio
The current ratio, a liquidity ratio, gauges your capacity to use your short-term investments to settle your short-term debts. A high current ratio shows that your company is well-positioned to meet its immediate obligations. You and your investors may now rest easy.
A strong current ratio may boost investor confidence. This is because it shows that your business can pay its expenses and is in good financial shape.
You can calculate the current ratio using the formula below:
Final Thoughts
Ten essential financial metrics that may assist you in better understanding the state of your company and guide it toward profitability. Recall that these 10 metrics are comparable to your company’s condition.
Thus, it is essential to the development of unified financial management platforms like Paci.ai. All of these KPIs are now trackable using an integrated platform. Thus, don’t delay any longer.
Connect with us right now to learn more about financial management.
