Article Summary: Although you don't need to be an accountant or financial expert to build a successful and thriving business, there are a handful of financial metrics you need to have at your fingertips. These metrics will help you monitor the financial health of your business, make you aware of potential challenges so you're not blindsided by a problem you didn't foresee, and otherwise give you the financial tools you need to grow your business.
Although these metrics are pretty straightforward and logical, it's worth giving them some attention because there could be more there than meets the eye:
- Cash Flow
- Accounts Receivable Aging
- Accounts Payable Aging
Not only are these metrics important to help you build your business, having this information at your fingertips is a good idea when applying for a small business loan. Although it's no guarantee of an approved application, a lender will be more likely to give preference to a business owner who understands and can articulate how their business is performing at a financial level. Keep reading to learn more.
Financial Metrics You Should Know to Run Your Small Business
Understanding your business’ financial metrics, and what those numbers are telling you, is critical to running a successful business, 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.
There are a handful of metrics I think every business owner should be familiar with, and here is a quick recap of the 5 Small Business Financial Metrics You Need to Understand from our small business resource center.
I’ll preface my suggestions with the following disclaimer:
“I’m not an accountant and although I believe, from my personal experience, that these are some of the more important metrics every business owner needs to be familiar with, you should also speak with your accountant or a trusted financial advisor to see if there are any other metrics he or she feels are more important for your business and get their perspective on what these metrics mean and how you should measure them.”
Most of these metrics are pretty straightforward and logical, but hopefully, I’ll be able to add something based upon my experience as a small business owner and shed some light on how I monitored these metrics in my business.
Without business income, or revenue, nothing else happens. Nobody gets paid. Products don’t get delivered. Supplies can’t be purchased. Without revenue, businesses can’t sustain operations. In my opinion, this is one of the first metrics you need to be intimate with.
There are several ways to categorize your expenses, and your accountant can help you with those; but ultimately, you want to know what it costs to do business and whether or not your business income is sufficient to meet those business expenses. It’s the difference between your income and expenses that determine if your business is profitable or not. After all, profits should be one of the primary goals of going into business for yourself.
3. Cash Flow:
Inadequate cash flow has rung the death knell for 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; you need to understand your Cash Flow Metric.
4. Accounts Receivable Aging:
This is an important metric that you can’t afford to ignore. 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.
5. Accounts Payable Aging:
Another number you should know is the average number of days it takes you to meet your business’ financial obligations. If you’re able to effectively manage your Accounts Receivable, your cash flow, and your income, you should be able to keep your accounts payable current and maybe even take advantage of the prompt payment terms you’re suppliers likely offer you.
In my opinion, it’s important to have a handle on these five metrics to run a successful business. You may even want to dive a little deeper into one or two of them. For example, you can categorize income streams or identify particular classes of expenses that might make it easier to understand and control. Your accountant or CPA can help you identify the metrics that will give you the most insight into your business.
Don’t be afraid to ask him or her questions if there are terms or formulae you are unfamiliar with. You accountant should be able to explain them in terms you’ll understand. One of the big mistakes I made as a business owner was treating my accountant as a transactional relationship, rather than a consultative relationship that had the potential of helping me more easily grow my business. In hindsight, I wish I had leveraged that relationship more to my advantage.
Are there any metrics you think I might have missed?