Keeping a pulse on your business’s financial health is crucial for informed decision-making and sustainable growth. But with a sea of financial data available, where do you even begin? Here are 5 key financial metrics you should be tracking every month, along with why they matter:
1. Revenue: This is the lifeblood of your business. Track both total revenue and revenue growth rate (compared to the previous month or year). Why it matters: Revenue tells you how much money you’re bringing in, indicating the effectiveness of your sales and marketing efforts. A declining revenue trend could signal a need for adjustments.
2. Gross Profit Margin: This metric reveals the profitability of your core business activities. It’s calculated by subtracting the cost of goods sold (COGS) from your revenue and then dividing by revenue. Why it matters: Gross profit margin shows how efficiently you’re converting expenses into profit. A shrinking margin might indicate rising COGS or pricing inefficiencies.
3. Net Profit Margin: This takes things a step further by factoring in all business expenses, not just COGS. Net profit margin is calculated by subtracting total expenses from revenue and then dividing by revenue. Why it matters: This metric reveals your overall profitability after accounting for all operational costs. A consistently low net profit margin might necessitate cost-cutting measures.
4. Cash Flow: Revenue might look good on paper, but cash flow is the king of short-term financial health. Track both operating cash flow (cash generated from core operations) and free cash flow (cash available after capital expenditures). Why it matters: Cash flow ensures you have the resources to pay bills, invest in growth, and weather unexpected financial bumps.
5. Accounts Receivable (AR) Turnover Ratio: This metric measures how efficiently you collect payments from customers. It’s calculated by dividing your total sales by your average accounts receivable balance. Why it matters: A high AR turnover ratio indicates efficient collection practices and minimizes the risk of bad debt. A low ratio could suggest a need for stricter credit policies or improved collection efforts.
Bonus Tip: Track Industry Benchmarks! Don’t just track your own numbers – compare them to industry benchmarks to see how you stack up against your competitors. This can provide valuable insights and identify areas for improvement.
By monitoring these 5 key financial metrics each month, you’ll gain a clear understanding of your business’s financial performance. This data will empower you to make informed decisions, identify areas for improvement, and ultimately steer your business towards long-term financial success.To dig further into your financial health, contact Loftis Consulting today.
