There’s no question that the coronavirus pandemic has thrown us all for a loop. Right now, you’re likely doing everything you can to build your business back up and keep it afloat. But if you don’t have a set of key financial metrics to reference, you won’t be able to manage your company’s finances responsibly during these challenging times.
To ensure that the financial aspect of your company’s health remains in good shape, you must rely on data. In doing so, you can get valuable insight to help in making decisions that will benefit your business now and in the future.
The Value of Identifying and Reviewing Key Financial Metrics
Make no mistake—you should be evaluating the financial aspect of your company’s health consistently. However, given the current state of the marketplace, it’s more important than ever to analyze your data on a daily basis.
Because taking a close look at how your business is faring financially is crucial to achieving long-term success. And when you’re going through a rough patch (like now), you can’t leave anything up to chance.
When you take the time to review key financial metrics, it gives you a better understanding of your company’s performance. Moreover, it provides you with the information you need to answer questions such as…
- Where should I allocate dollars?
- What should I be paying staff?
- How can I budget more effectively?
- Where is there waste?
- How can I better engineer profitability?
Additionally, it offers you an accurate prediction of how your business will do in the future under normal circumstances.
9 Key Financial Metrics You Can Use to Measure Business Performance
As a business owner, you need a comprehensive view of your company’s finances, which is why you can’t just look at one type of data. Instead, you need to look at several.
With that in mind, here are nine key financial metrics you can use to measure your company’s financial health and overall performance…
1) Operating Cash Flow
What it is: Your company’s operating cash flow is the amount you generate from your primary operations. It shows if you’re producing enough cash from these activities to grow your business or if additional financing is required.
How to calculate it: There are a couple of ways to calculate your operating cash flow. The first is to subtract your operating expenses from your total revenue. The second is to take your net income, add or subtract changes in assets/liabilities, and add non-cash expenses.
2) Gross Profit Margin
What it is: Your gross profit margin determines the amount of money your company has left over from revenue after accounting for the cost of goods sold. This is an important indicator of whether your business can cover its operating expenses and have a sufficient amount remaining.
How to calculate it: You can calculate your gross profit margin by subtracting the costs of goods sold from your revenue, then dividing that number by your revenue.
3) Net Profit Margin
What it is: This metric shows how efficient your company is at generating a profit on the revenue it brings in. Essentially, it’s a good indication of how profitable your business is.
How to calculate it: To determine your net profit margin, divide your net profit by your revenue. Note that it’s frequently calculated as a percentage.
4) Current Accounts Receivable
What it is: Your company’s current accounts receivable highlights the amount of money it’s owed by debtors—typically your customers. Of all the key financial metrics on the list, this is one of the most important.
It can help you estimate the amount of income you can expect to receive and determine how long it takes the average customer to pay their debt.
How to calculate it: To calculate your current accounts receivable, you simply need to add up all outstanding invoices. Then, you need to track the amount of time between invoice receipt and payment receipt.
5) Current Accounts Payable
What it is: On the flip side of current accounts receivable is current accounts payable. This metric refers to the amount of money your company owes to vendors, banks, creditors, etc. Having this up-to-date data allows you to plan your budget better.
How to calculate it: As with current accounts receivable, calculating current accounts payable is fairly simple. It’s just a matter of adding up all of your company’s outstanding bills, then taking note of how long it takes to pay them.
6) Inventory Turnover
What it is: With inventory turnover, you can find out how efficient your company is at selling and replacing inventory within a given period. Ultimately, this metric shows how well your business is doing in terms of making sales and restocking inventory.
How to calculate it: To calculate inventory turnover, you can take the cost of goods sold in a particular period and divide by the average inventory for that same period. Or, you can divide sales by inventory. The higher the inventory turnover, the better.
7) Quick Ratio
What it is: Quick ratio is another one of the key financial metrics on this list that provides valuable insight into the financial aspect of your company’s health. It essentially demonstrates whether your business is able to cover short-term financial responsibilities. As the name suggests, it’s a quick way of assessing the wealth and health of your business.
How to calculate it: To determine your company’s quick ratio, subtract your inventory from your current assets, then divide that number by your current liabilities. A quick ratio of higher than 1 shows your business is in a good position.
8) Return on Equity
What it is: Return on equity refers to the revenue your company generates for each unit of shareholder equity. This is important for two reasons:
- It shows how efficiently your company is using shareholder investments.
- It determines whether your company’s net income fits its size.
How to calculate it: To calculate your return on equity, take your net income and divide by the shareholder equity. Generally, a return on equity of between 15% and 20% is considered good.
9) Customer Acquisition Cost
What it is: Although all of the key financial metrics on this list can shed light on your company’s performance, this one is especially good for determining the effectiveness of your sales and marketing campaigns. Essentially, your customer acquisition cost shows how much you’re spending to acquire new customers.
How to calculate it: To calculate this cost for a given period, take your total sales and marketing expenses and divide by the number of new customers acquired.
Having a good grasp of the financial aspect of your company’s health should always be a priority. However, finding out exactly how well your business is doing now is crucial to not just surviving the downturn but coming out stronger than before.
If you’re having a hard time with the financial side of things, don’t hesitate to reach out to Smart Business Doctor for a free consultation.