Five key financial metrics your business should be tracking for financial health
When you set up your business, it’s important that you recognise the value of data, particularly financial data.
Data provides you with insights into how your business is performing, allows you to set firm, numerical goals and track your progress towards them.
However, it’s equally important that you track the right metrics – otherwise you’re simply collecting data without a purpose.
This is particularly true when it comes to financial health. You should know which data points show you genuine issues or successes, and which ones aren’t so relevant.
By tracking the following metrics and working closely with your accountancy team, you can more effectively identify areas where you need to make changes, reduce costs or allocate further investment.
- Cash flow
Cash flow is the net amount of cash being transferred into and out of a business.
Monitoring cash flow helps ensure that your business has enough liquidity to meet its obligations and avoid defaulting on debts or core operating costs.
Regularly updated cash flow statements can provide insights into operational efficiency, show you where liquidity could become an issue and help you to plan for the future.
- Profit margins
This metric measures the percentage of revenue that remains as profit after all expenses are deducted from total revenue.
It provides a clear view of the overall profitability of the business and its efficiency in managing costs.
Tracking net profit margin over time helps you to understand whether your business is improving in its operational efficiency and profitability.
It can also be broken down to show you areas where costs could be controlled or reduced.
- Staff costs
Staffing will represent a significant chunk of your operational costs and therefore needs to be monitored carefully.
Staff costs as a percentage of revenue indicate what proportion of total income is being spent on employee remuneration and associated costs – showing you whether you can afford to bring on more staff and whether your current arrangements are sustainable.
It is calculated as:
Staff costs / revenue x 100 = staff costs as percentage of revenue
You may also consider looking at each part of your business is isolation and identifying areas where staff costs could be reduced through adopting technology or streamlining roles.
- Current ratio
Current ratio refers to the ability of your company to pay short-term debts and liabilities with liquid assets.
A healthy ratio will sit above one, indicating that your business has more liquid assets than liabilities.
A ratio below one isn’t necessarily a problem, but you may face issues in repaying unexpected debts or making further investments.
- Break-even point
In their first months and even years of life, many businesses make a loss.
You should keep an eye on the point at which you will begin to break even – when revenue becomes sufficient to cover total costs.
This is important because, if it takes two years for your business to become profitable, then you need to ensure that you can keep the business going with your existing capital for that period of time.
Support for your business
Starting a business is an exciting time but it can present a number of financial challenges as you develop a long-term strategy.
These issues can be addressed by tracking metrics and working with your accountant to identify areas where costs are too high or where you could make further investments.
We can advise you on developing a financial strategy for your business and tracking financial health through key metrics. Contact our team today for further guidance.
