FINANCIAL METRICS 101: NUMBERS EVERY BUSINESS SHOULD TRACK
Understanding financial metrics is key to running a profitable and sustainable business. Whether you are managing day-to-day cash flow or planning for long-term growth, tracking the right numbers helps you make informed decisions and avoid financial blind spots.
We previously covered key accounting terms in our Accounting Jargon 101, and now, we are breaking down the essential financial metrics every business should monitor.
Profitability Metrics
These numbers tell you if your business is making money, or just breaking even.
Gross Profit Margin
Shows how much profit is left after selling a product or service. This shows how much “profit” is left to pay the non-sale expenses (e.g. rent, admin salaries, government licences, etc.)
Formula:
📊 (Revenue – COGS) ÷ Revenue × 100
🔹 A higher gross margin means your business is keeping more of its earnings.
🔹 If margins are too low, it may signal pricing issues or high production costs.
Net Profit Margin
Takes all expenses into account, including operating costs, taxes, and interest, to show how much actual profit the business makes.
Formula:
📊 (Net Profit ÷ Revenue) × 100
🔹 A healthy net profit margin means the business should be generating cash and is effective at pricing above it’s expenses.
🔹 A declining margin may indicate falling prices, rising costs or inefficiencies.
Break-Even Point
The level of revenue needed to cover all costs—at this point, the business is neither making nor losing money.
Formula:
📊 Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)
🔹 Helps in pricing strategy and cost control.
🔹 Essential for startups and businesses launching new products.
Cash Flow Metrics
Profitability does not always mean healthy cash flow. These metrics help track the actual movement of money in and out of the business.
Operating Cash Flow (OCF)
Measures how much cash is generated from business operations, without factoring in financing or investments.
Formula:
📊 Net Income + Non-Cash Expenses + Changes in Working Capital
🔹 Positive OCF means the business is generating enough cash to cover expenses.
🔹 Negative OCF for an extended period can lead to cash flow problems.
Cash Conversion Cycle (CCC)
Shows how quickly a business can convert its investments in inventory and other resources into cash.
Formula:
📊 Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding
🔹 A shorter cycle means faster cash flow.
🔹 A longer cycle could indicate inefficient billing, delays in payments or slow-moving stock.
Liquidity & Stability Metrics
These metrics show how well a business can meet short-term financial obligations.
Current Ratio
Measures whether a business has enough short-term assets to cover its short-term liabilities.
Formula:
📊 Current Assets ÷ Current Liabilities
🔹 A ratio above 1 suggests financial stability.
🔹 A ratio below 1 may indicate cash flow struggles.
Debt-to-Equity Ratio
Shows how much of the business is funded by debt versus owner or investor equity.
Formula:
📊 Total Liabilities ÷ Shareholders’ Equity
🔹 A high ratio suggests heavy reliance on loans, which could increase risk.
🔹 A low ratio indicates a business is more self-funded but may be missing growth opportunities.
Efficiency Metrics
These numbers indicate how well a business is managing its resources and converting investment into revenue.
Return on Investment (ROI)
Measures how profitable an investment is.
Formula:
📊 (Net Profit ÷ Cost of Investment) × 100
🔹 A higher ROI means the investment is generating good returns.
🔹 Helps in evaluating the success of marketing campaigns, new product launches, or capital expenditures.
Inventory Turnover
Shows how often inventory is sold and replaced within a given period.
Formula:
📊 Cost of Goods Sold ÷ Average Inventory
🔹 A high turnover suggests strong sales.
🔹 A low turnover may indicate overstocking or slow-moving products.
Why Tracking Financial Metrics Matters
Understanding these numbers is not just about bookkeeping, it’s about making better business decisions. By monitoring the right financial metrics, businesses can:
✅ Spot cash flow issues early and act before they become problems. (we have recently done an article on this which you can find here)
✅ Identify areas of overspending and improve profitability.
✅ Plan for growth with confidence, based on real data rather than guesswork.
The key is to track metrics regularly, use tools that provide real-time insights, and adjust based on what the numbers reveal.
If you are looking for clearer financial reporting and better decision-making, head over to our contact page and let’s talk!
