4 Financial Metrics Every Small Business Owner Should Know
By: Aries Payne
As a small business owner, understanding your finances isn’t just about balancing the books—it’s about making smarter decisions that drive growth and profitability. Financial metrics provide valuable insights into your business’s health, helping you track performance, manage cash flow, and plan for the future. But which numbers should you know?
Here are some basic financial metrics you should be familiar with as a business owner and why they’re important:
Revenue
Your revenue is your business's total income from sales before any expenses are deducted. This financial metric can help you measure your business’s performance. Tracking your revenue regularly allows you to identify seasonal patterns and optimize your marketing and sales strategies to adjust to fluctuations throughout a given year.
Net Income
Your net income, or profit, is your total revenue minus total expenses:
Total Revenue – Total Expenses = Net Income
This financial metric represents your business's actual profit during a selected period. Knowing this information is key to understanding how much profit you retain after fulfilling all your business's financial commitments, such as tax duties.
Gross Profit Margin
Your gross profit margin is a percentage calculated by subtracting the cost of goods sold from your total revenue, divided by revenue:
(Revenue – Cost of Goods Sold)/Revenue x 100 = Gross Profit Margin
This metric can help you determine the profitability of each sale after accounting for production costs. The better your business’s cost management and pricing strategies, the higher your gross profit margin. In contrast, a lower gross profit margin may indicate ineffective or inefficient cost management and pricing strategies.
Cash Flow
Cash flow is a measure of how much money moves in and out of your business. It’s an essential metric to learn if you want to ensure your business can meet its financial obligations. A positive cash flow indicates that your business has more money coming in than going out, while a negative cash flow means the opposite.
Other Metrics to Measure Business Financial Sustainability
The following are a few other important metrics worth knowing that may not necessarily be featured on standard financial statements:
- Customer Acquisition Cost – This is the total cost of acquiring a new customer. This metric can help you determine the efficiency of your marketing and sales strategies. A high customer acquisition cost indicates inefficient customer acquisition strategies.
- Customer Lifetime Value – This is the total revenue expected from a single customer throughout their relationship with your business. The metric helps you identify the long-term value of customers and optimize retention strategies.
- Debt-to-Equity Ratio – This metric measures your business’s proportion of debt to equity. Financial institutions and lenders may review this metric to assess your business’s level of risk. A high ratio indicates a greater reliance on debt, which can increase your financial risk.
- Burn Rate – This metric is the rate at which your business spends its cash reserves. The burn rate is a critical metric for businesses with negative cash flow, as it helps owners determine how long the business can operate without additional funding.
By understanding and tracking these key financial metrics, small business owners can gain valuable insights into their business’s health, identify areas for improvement, and make informed decisions that drive growth and profitability. To learn more about financial metrics, what they mean for your business, and more check out these recorded webinars on managing finances.
