8 Key financial metrics every business Should Track
by Stuart Mclendon, Flexion Point CEO
As the CEO of a fractional accounting, finance and HR services company, I have had the privilege of working with a diverse range of businesses across various industries. One common denominator for success, regardless of the sector, is a firm grasp of key financial metrics. These metrics are essential for making informed decisions, maintaining financial health, and driving sustainable growth. Here, I’d like to highlight the key financial metrics every business should track.
revenue growth
Revenue growth is the lifeblood of any business. It’s not just about the bottom line; it’s about understanding how well your business is expanding over time. By tracking revenue growth, you can identify trends, forecast future performance, and make strategic adjustments to ensure continued success.
Why it matters:
Revenue growth indicates the health and potential scalability of your business. It helps you understand market demand, the effectiveness of your sales strategies, and the overall direction of your business.
2. Gross Profit Margin
Gross profit margin is the percentage of revenue that exceeds the cost of goods sold (COGS). It reflects how efficiently a company is producing its goods or services.
Why it matters:
A healthy gross profit margin ensures that a company can cover its operating expenses, invest in growth opportunities, and withstand market fluctuations. Monitoring this metric helps identify areas where cost efficiencies can be improved.
3. operating cash flow
Operating cash flow measures the cash generated by a company’s normal business operations. It’s a key indicator of a company’s ability to generate sufficient cash to maintain and grow its operations.
Why it matters:
Positive operating cash flow is crucial for sustaining day-to-day operations without relying on external financing. It indicates financial stability and the ability to reinvest in the business.
4. Net profit margin
Net profit margin is the percentage of revenue that remains after all expenses, taxes, and interest have been deducted. It’s a measure of overall profitability.
Why it matters:
A strong net profit margin demonstrates efficient management and a company’s ability to turn revenue into actual profit. It’s a critical metric for investors and stakeholders to assess the company’s financial health and long-term viability.
5. Accounts receivable turnover
This metric measures how effectively a company collects revenue from its customers. It’s calculated by dividing net credit sales by average accounts receivable.
Why it matters:
High accounts receivable turnover indicates efficient credit policies and effective collection processes. It’s vital for maintaining healthy cash flow and reducing the risk of bad debts.
6. current ratio
The current ratio is a liquidity ratio that measures a company’s ability to cover its short-term obligations with its current assets. It’s calculated by dividing current assets by current liabilities.
Why it matters:
A current ratio above 1 indicates that a company has more current assets than current liabilities, suggesting good short-term financial health. It’s a key metric for assessing a company’s ability to meet its immediate financial obligations.
7. debt-to-equity ratio
This ratio compares a company’s total liabilities to its shareholder equity, providing insight into the company’s financial leverage.
Why it matters:
A lower debt-to-equity ratio indicates a lower risk for creditors and investors, while a higher ratio suggests a company may be over-leveraged. Balancing this ratio is crucial for financial stability and reducing risk.
8. return on investment (roi)
ROI measures the profitability of an investment relative to its cost. It’s a critical metric for evaluating the efficiency of an investment.
Why it matters:
Tracking ROI helps businesses determine the best investment opportunities and allocate resources effectively. It’s essential for making strategic decisions and ensuring that investments are generating adequate returns.
conclusion
By diligently tracking these key financial metrics, businesses can gain valuable insights into their financial performance and make informed decisions that drive growth and stability. As CEO, it’s my mission to ensure that our clients not only understand these metrics but also leverage them to achieve their strategic goals. Remember, what gets measured gets managed. Stay vigilant, stay informed, and steer your business towards sustained success.
If you have any questions or need assistance in implementing these metrics, feel free to reach out. Let’s navigate the financial landscape together and secure a prosperous future for your business.
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