Understanding your business’ financial metrics, and what those numbers are telling you, is critical to running a successful business. It’s key to knowing whether or not your business is profitable, or waking up one day to find out you’re on the slow march to insolvency and going out of business.
Here is a quick recap of the 4 financial metrics small business owners should be familiar with.
As these are only some of the important metrics, you could also speak with your accountant or trusted financial adviser to see if there are more metrics that are important to your business. After all, getting their perspective on what the metrics mean and how you should measure them may be of help.
1. Income:
Without business income, or revenue, nothing else happens. Nobody gets paid. Products don’t get delivered. Supplies can’t be purchased. Therefore, businesses can’t sustain operations without revenue.
2. Cash Flow:
Inadequate cash flow has prevented the success of many small businesses over the years. If you’ve ever heard the term, “Cash flow is king,” this is what it’s talking about. It’s not enough to simply have money in your business checking account at the end of the month. Additionally, it is important that you understand your Cash Flow financial metric.
3. Accounts Receivable Ageing:
How long does it take your customers, to whom you offer credit terms, to pay their invoices? If you offer 30-day terms, do they consistently pay in 30 days or do they sometimes go 45 or 60 days.
4. Accounts Payable Ageing:
Additionally, a number you should know is the average number of days it takes you to meet your business’ financial obligations. By effectively managing your Accounts Receivable, cash flow, and income, you should be able to keep your accounts payable current. Then, you could maybe even take advantage of the prompt payment terms you’re suppliers likely offer you. Also, providing you meet the credit terms agreed upon with your suppliers, buying supplies on credit could help you build your credit profile.
You may even want to dive a little deeper into one or two of these financial metrics. For example, you can categorise income streams or identify particular classes of expenses that might make it easier to understand and control. Moreover, your accountant or CPA can help you identify the metrics that will give you the most insight into your business.
