Five Financial Indicators Every Small Business Should Monitor
Starting a small business can be exciting, but it also comes with a lot of responsibilities. One of the most important responsibilities is monitoring the financial health of your business. As a small business owner, it is crucial to keep track of your finances and understand the financial indicators that can help you make informed decisions. In this blog, we will discuss five financial indicators that every small business owner should monitor.
Cash flow is the most crucial financial indicator that every business owner should monitor. It is the movement of money in and out of your business. Cash flow is essential for the survival of any business as it helps you determine whether you have enough money to pay your bills, salaries, and other expenses. To monitor your cash flow, you need to keep track of your inflows (revenue) and outflows (expenses). By creating a cash flow statement, you can easily see the amount of money you have coming in and going out of your business.
Gross Profit Margin:
Gross profit margin is the difference between revenue and the cost of goods sold. This financial indicator shows how much money you are making on the products or services you sell. To calculate your gross profit margin, divide your gross profit by your revenue, and multiply by 100. A high gross profit margin indicates that your business is making enough money to cover your expenses and generate profits.
Net Profit Margin:
Net profit margin is the amount of profit you have left after deducting all your expenses, including taxes. This financial indicator is essential because it shows the profitability of your business. To calculate your net profit margin, divide your net profit by your revenue, and multiply by 100. A high net profit margin indicates that your business is operating efficiently and generating profits.
Accounts Receivable Turnover:
Accounts receivable turnover is a financial indicator that shows how quickly your customers are paying their bills. This financial indicator is crucial because it affects your cash flow. To calculate your accounts receivable turnover, divide your total credit sales by your average accounts receivable balance. A high accounts receivable turnover indicates that your customers are paying their bills on time, which helps you maintain a healthy cash flow.
Debt-to-equity ratio is a financial indicator that shows the amount of debt your business has compared to its equity. This financial indicator is essential because it shows your business’s financial leverage. To calculate your debt-to-equity ratio, divide your total liabilities by your total equity. A high debt-to-equity ratio indicates that your business has more debt than equity, which can affect your credit rating and borrowing capacity.
In conclusion, as a small business owner, it is essential to monitor your finances regularly. By keeping an eye on these five financial indicators, you can make informed decisions about your business’s future. Remember, a healthy financial status is the backbone of any successful business.