7 Key Financial Metrics Every Small Business Owner Should be Tracking
Whether you are a startup, a small business owner, or a CEO (or just really like watching Shark Tank and get confused by the lingo), there are many financial metrics you need to be aware of.
But what is a metric?
A metric is simply a data point that a company monitors to track a business’s performance in some area. This could be anything from tracking social media followers to order processing times. However, for the purposes of this article, we are discussing financial metrics, which are metrics involving specific aspects of the finances of a business.
Different financial metrics might be more important than others depending on the stage of life your business is in. However, there are some common, key financial metrics that every business – from startup to corporation – should be aware of and analyzing so they don’t end up as a part of the roughly 70% eventual business failure rate.
While this list is by no means exhaustive of the dozens of figures important to a business report, here are 7 key financial metrics that every small business owner should be tracking.
1. Cash Flow
2. Gross Profit Margin Ratio
3. Profit Margin Ratio
4. Budget vs. Actual
5. Break-even Point
6. Average Customer Acquisition Cost
7. Churn Rate
1. Cash Flow
The first key financial metric we will go over is often referred to as the lifeblood of a company, especially a start-up or small business: cash flow. The flow of cash in and out of your business is how it operates, and can tell you a lot about the health of your business. If more money is coming into your business (revenue) than going out (to pay expenses), it has a healthy, positive cash flow. The reverse reveals a negative cash flow, which cannot be maintained for long.
Cash flow is closely linked to a couple of other important financial metrics, including burn rate and cash runway. Burn rate is a measurement of the amount your company spends in a specific period of time, usually a month. Cash runway is a calculation of the amount of time your company has before it runs out of money based on how much cash it has on hand and the current burn rate.
2. Gross Profit Margin Ratio
You’ll hear the Sharks on Shark Tank talk about this next financial metric a lot. The gross profit margin ratio is important to investors. This is especially true at the start-up stage, because it gives them an idea of how potentially profitable your specific product might be. The gross profit margin ratio reflects how much revenue your company makes per product after costs.
You calculate this by deducting only the direct cost of manufacturing or making the product from the sale price of the product. For example, let’s say a product sells for $10. If it costs $7 to manufacture, that leaves $3 gross profit. Reported as a percentage, this ratio shows the gross profit of the product per every dollar of revenue. In our example, if the gross profit margin is 30%, that means for every dollar of revenue generated, $0.30 is retained while $0.70 is attributed to the cost of goods sold.
A high gross profit margin ratio (usually anything over 10%) could keep a potential investor interested in your product. Anything less, and they might be out of the deal.
3. Profit Margin Ratio
The profit margin ratio is very similar to the gross profit margin ratio. However, this financial metric reveals the revenue a product brings in after taking into account the broader, total operating costs of your business. Whereas the gross profit margin ratio only considers the direct manufacturing costs to reflect manufacturing efficiency, the profit margin ratio will include ALL expenses such as taxes, fees, payroll, marketing, and other operating costs.
4. Budget vs. Actual
Budget vs. actual is a key financial metric that is explained just like it sounds. Just like in your personal budget, a company needs to be aware of its budgeted spending amount versus how much it is actually spending. This is much more revealing than simply looking at the bank account.
Knowing if you are at, over, or under budget can be an extremely important data point for your company in strategizing how best to use your funds. You might find you are overspending in a certain area and need to reign it back in and make some cuts. Or, you might find you are underspending and could redirect those funds into other areas of operations or investments.
5. Break-even Point
The next key financial metric to be aware of is your company’s break-even point. Your break-even point is when there is no profit or loss because your revenue equals your costs. This data point allows you to know when your business will start earning more than its spending. It can provide insight into how many products you need to sell to at least cover costs.
6. Average Customer Acquisition Cost
Average customer acquisition cost is a key financial metric that every business owner should know. It’s no breaking news that it costs companies more money to acquire new customers than it does to retain existing customers.
The average customer acquisition cost shows you just how much, on average, your business spends on acquiring new customers in a specific period of time. This metric can factor in a myriad of expenses, including marketing, some payroll, specific technologies used, etc. The cost of acquiring a customer usually presents as a similar average within an industry but varies widely between industries. On average, technology providers spend significantly more on acquiring customers than simple retailers.
Knowing this data point, your company can determine if its current business model is sustainable. If you’re spending too much money to find new customers, it might be time to cut costs there and use them for current customer retention or upselling.
7. Churn Rate
Lastly, one more important financial metric every business owner should know is their company’s customer churn rate. Your churn rate is the rate at which you lose customers over time. Suppose your company has a high churn rate. In that case, this could reflect a problem with how valuable your product is to your customers, poor customer service, or inefficient customer education of your product. Knowing the reason why you are losing customers is key to knowing what changes to make to keep the customers you have or even winning back lost customers, both of which cost less overall than acquiring new ones.
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