10 Financial Metrics Every Business Owner Should Monitor

Regardless of the size, age, or industry, all companies need to consistently monitor their financial performance. Long-term success and goal achievement greatly depends on generating revenue and managing your financial metrics. Having trackable metrics with benchmarks ensures healthy business performance. By tracking and monitoring specific financial metrics over time, the business owner can gauge cash flow management, profitability, management of debt, and health of the company sales. Financially sound companies are extremely mindful of many of these metrics below. Here are ten of the most common financial metrics to follow.

1. Gross Profit Margin
Gross profit margin is the percentage of sales revenue that a company is able to convert into gross profit. Gross profit equals revenue minus cost of goods sold (COGS) – (your direct operating costs). Companies use gross profit margin to determine how efficiently they generate gross profit from sales of products or services. If a company has net sales revenue of $100 and gross profit of $48, its gross profit margin is 48%. For every dollar of product sold, the company makes 48 cents in gross profit.

2. Net Profit Margin
Net Profit Margin (also known as “Profit Margin” or “Net Profit Margin Ratio”) is used to calculate the percentage of profit a company produces from its total revenue and other income left after subtracting all business costs, including costs of goods sold, operating expenses, and taxes. It measures the amount of net profit a company obtains per dollar of revenue gained. The net profit margin is equal to net profit (net income) divided by total revenue, expressed as a percentage. To calculate net profit margin, the formula is: Net Profit ⁄ Total Revenue.

3. Working Capital
Working capital is a financial metric calculated as the difference between current assets and current liabilities. Positive working capital means the company can pay its bills and invest to further advance business growth. When expressed as a ratio, a working capital greater than 1 indicates that your company can cover its current liabilities. The formula for calculating net working capital is: NWC=Current Assets-Current Liabilities. This financial metric should be regularly calculated and monitored to assess both liquidity and efficiency over time.

4. Current Ratio
Current ratio compares a company’s current assets to its current liabilities, essentially measuring a company’s ability to fulfil short-term financial obligations. It’s a good indicator of financial health and can warn of impending issues if the ratio is too low or even too high. The formula for current ratio is the total value of current assets divided by the total value of current liabilities.

5. Quick Ratio
The quick ratio is a basic liquidity metric that helps determine a company’s solvency. A company with a high quick ratio can meet its current obligations and still have some liquid assets remaining The quick ratio is calculated by dividing the sum of a company’s liquid assets (usually cash) by its current liabilities. The higher the ratio result, the better a company’s liquidity, and financial health.

6. Debt-to-Equity Ratio
The debt-to-equity ratio shows how much of a company is committed to creditors compared with how much equity is held by the shareholders. Debt capacity shows both a company’s ability to service its current debt payments and its ability to raise cash through new debt, if necessary. The debt-to-equity ratio is calculated by dividing a company’s total debt by the total equity of its shareholders. The debt-to-equity ratio helps investors and lenders understand the risk involved in business while making an investment decision.

7. Cash Conversion Cycle
The cash conversion cycle (CCC), also known as the net operating cycle, is the time businesses take to convert their inventory into sales-generating cash. It is one of the best ways to check the company’s sales efficiency. It helps a business owner know how quickly it can buy, sell, and receive cash. For businesses that manage inventory, offer credit to customers, and get credit from
suppliers, taking steps to improve the cash conversion cycle over time can increase cash flow, streamline operations, and provide a more stable platform for growth.

8. Total Asset Turnover
The total asset turnover ratio compares the sales of a company to its asset base. The ratio measures the ability of the business to efficiently produce sales. Ideally, a company with a high
asset turnover ratio can operate with fewer assets than a less efficient competitor, and so requires less debt and equity to operate. The formula to calculate this metric is Net sales ÷ Total assets = Total asset turnover.

9. Return on Equity (ROI)
Return on equity shows how well a company is managing the capital that shareholders have invested in it. To calculate this financial metric, divide net income by shareholder equity. The higher the return on equity, the more efficient a company’s management is at generating income and growth from its equity financing.

10. Return on Assets
Return on assets compares the value of a business’s assets with the profits it produces over a set period of time. Return on assets helps determine how effectively a company is using its resources to make a profit. To calculate this metric, divide the company’s net profit by its total assets. A ROA of over 5% is generally considered good and over 20% is excellent.

Final Thoughts
Which of these financial metrics are you monitoring? Any that you have overlooked? Business metrics contribute to a business achieving its strategic and fiscal goals. They help business owners make better decisions and assess the effectiveness of their business operations as well as how the company performance compares to the competition.

If you should need guidance or have questions regarding the best metrics for your company to monitor, please reach out for a complimentary discussion.   I look forward to speaking with you.  Email PeggyHead@b2bcfo.com.