The 4 Key Financial Metrics to Track for Business Success
As a small business owner, it's important that you keep a close eye on your finances. However, with so many metrics and KPIs to look at, it can be difficult to know which numbers to focus on. So, to help you out, we've put together a list of the four key financial metrics that you need to track for business success.
- Author
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Steven Case
#1 - Cash Flow
Cash flow is one of the most important indicators of a company's financial health. Cash flow is the money that is going in and out of your business, including everything from sales revenue to expenses. It's possible to be operating at a profit and run out of cash, as expenses may be due before payments are received. Therefore, it's important to keep an eye on your cash flow in order to avoid any unexpected surprises.
It's vital that you forecast cash flow so that you can see how much money will be coming into the company over the course of a month or year. You should also monitor it monthly so that you'll know exactly how much money is available for things like inventory, payroll, and other operating expenses.
If you're having trouble with cash flow, there are a few things you can do to improve the situation, including:
Creating a cash reserve
Automating invoices
Shortening payment cycles
Using a business credit card or line of credit
Reducing expenses
Improving inventory management
Leasing equipment rather than buying outright
#2 - Profit
You're in business to make a profit, so it's vital to track how much money you're actually making. Profit is not the same thing as turnover; turnover is the total amount of revenue your business generates, while profit is the amount of money you have left over after expenses are paid.
Profit can be affected by a number of things, including changes in sales volume, product mix, and pricing. It's important to track profits on a regular basis so that you can identify any trends and make the necessary adjustments.
If your profit margins are shrinking, you may need to find ways to reduce your expenses or increase your sales volume. You could also consider raising your prices if you feel that the market will bear it.
On the other hand, if profits are increasing, you may want to examine what's driving this growth and see if you can replicate it.
#3 - Accounts Payable
Accounts payable is the amount of money a company owes to its suppliers for goods and services that have been purchased. It's important to keep track of this number so you know how much money you're spending each month and how long it will take you to pay off your debts.
Ideally, you want to keep accounts payable as low as possible by setting up a payment schedule with your suppliers and making sure you have enough cash on hand to cover the payments.
#4 - Accounts Receivable
Accounts receivable is the amount of money a company is owed by its customers for products or services that have been sold. If your accounts receivable figure is high, then this can create cash flow problems.
You should also keep an eye on your ageing accounts, which are those invoices that are overdue. If you have many ageing accounts, it's possible your customers aren't paying their invoices on time or might not pay at all.
It's important to stay on top of your invoicing process so that you can get paid as soon as possible. You could consider offering a discount for early payment or setting up a payment plan with your customers.
Summary
The four key financial metrics to track are cash flow, profit, accounts payable, and accounts receivable. By monitoring these numbers on a regular basis, you'll be able to keep tabs on your company's financial health and make adjustments as needed.