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7 key financial metrics to track for your business

If you are someone who is running a small business or have started your entrepreneurial journey, this article is something that will help you lay down a strong financial foundation for your business. Considering the available number of key performance indicators for the finance department, It can be challenging for one to determine – what the key financial metrics you can track for your business.
The basic idea of financial metrics is to help small businesses understand if they have cash on hand whenever they need it. Tracking financial KPIs not just helps business to understand if it is performing well or not, but also helps build confidence for investors and lenders.
Below, we have the list of 7 financial metrics that is relevant to most businesses.
You can also check out our article on – Metrics & ratios that matter for business.

Revenue

Revenue is the total amount of money that a business makes by selling products, and services before any expenses are taken out. Revenue is also called sales or top-line income and is a critical part of the calculation for most financial metrics.
You can calculate revenue using the formula below –
Revenue = Sale price X Units sold

Expenses

Another very common financial metric that every business usually tracks is – Expenses. Expenses are all the costs a business needs to operate. However, there are some exceptions such as VC-backed startups. For a business to operate profitability, it is important that revenue is always more than expenses.
Usually, expenses can be grouped into two different categories – operating expenses (these are the expenses that are a direct result of doing business like production costs, mortgages, and administrative costs) & non-operating expenses (these are more indirect expenses like interest on other lending fees).
You can calculate expenses using the formula below –
Expenses = Cost of goods sold + salaries + sales commissions + marketing costs + real estate expenses + utilities

Net Income (Net profit)

Net profit or net income is the money left over after subtracting all the expenses & taxes for revenue. The basic goal of every small business is to make enough revenue to cover all the expenses because if they don’t, there is a risk of falling into debt which eventually is harmful to a business.
Usually, in the financial world, net income is also called the “bottom line”.
You can calculate net income using the formula below –
Net profit = Revenue – Total expenses

Cash flow (Operating cash flow)

Since every small business runs on the money coming in to pay the expenses, cash flow is one of the key financial metrics that they need to track. Cash flow refers to the amount of money moving in and out of your business over a period of time. In simple words, if the money coming in is less than the money going out, your business ends up having negative cash flow.
Operating cash flow is the amount of cash a company makes through typical operations. Calculating that allows you to understand how much money your business can spend in the immediate future or whether you should reduce spending.
You can calculate operating cash flow using the formula below –
Operating cash flow = Net income + Non-Cash expenses – Increase in working capital.

Working Capital

Working capital is another critical financial metric that every business must track. It is the difference between the current assets (cash, accounts receivables & short-term investments) and liabilities (accounts payable, payroll, debt payments, and taxes).
Tracking this metric allows businesses to know about available liquidity to cover immediate expenses.
You can calculate Working capital using the formula below –
Working capital = Current assets – Current liabilities

Accounts receivable ageing

Accounts receivable ageing is a metric that measures how many days it takes your customers to clear the invoice. Companies often tend to include credit terms on an invoice that provides clear time period for when they have to clear the payments. Usually, businesses tend to organise the clients by due date – immediately is 1-30 days, 31-60 days – late to see how much money is collectable from different clients and customers.
In case account receivable consistently run behind, it can cause a serious problem in cash flow and working capital.

Accounts payable ageing

It is quite similar to accounts receivable ageing except, it looks at how many days it takes for your business to clear the dues. Similar to accounts receivables, accounts payables are also organised on the basis of their upcoming date.
Revenue, cash flow, and accounts receivable are all indicators of how your business can keep up with the invoices from their suppliers, vendors, and other business partners.
These are the 7 key financial metrics that every small business must track to understand its financial status. Each one of these metrics like revenue, cash flow, expenses, etc, will help you get a proper hold on the finances of your business and determine if you are running a business profitably or not.
There are many financial management tools, cash flow management software, and accounting tools that you can use to track these KPIs for finance department. Thanks to the evolution of unified financial management software like Paci Finance, you can now track all these metrics using a single software. So, wait no more… try it out for yourself and decide if the tool is helpful or not.

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