Top 4 Financial Metrics Every Small Business Must Track

As a small business owner, it is crucial to monitor your finances closely. However, given the overwhelming number of metrics and KPIs, knowing which numbers deserve your attention can be challenging. 

To simplify this process, we've identified four critical financial metrics vital for business growth and success. Monitoring these metrics can help you make more informed decisions and ensure your company's financial health.

1. Cash Flow

Cash flow is one of the most critical indicators of a company's financial health. It represents the money flowing in and out of your business, encompassing sales revenue, expenses, and other transactions. It can be profitable on paper, but cash shortages still occur, especially if expenses are due before payments are received. Therefore, tracking cash flow is essential to avoid unexpected financial challenges.

To manage cash flow effectively:

Forecast Cash Flow: Project your cash flow monthly or annually to anticipate the money coming into your company.

Monitor Monthly: Regularly review your cash flow to ensure you have enough funds for inventory, payroll, and operating expenses.

If you're facing cash flow issues, consider these strategies:

Create a Cash Reserve: Set aside funds to cover unexpected expenses.

Automate Invoices: Streamline your invoicing process to get paid faster.

Shorten Payment Cycles: Encourage quicker payments from customers.

Use Credit Options: Utilize business credit cards or lines of credit to manage short-term cash flow gaps.

Reduce Expenses: Cut unnecessary costs to free up cash.

Improve Inventory Management: Optimize stock levels to reduce tied-up capital.

Lease Equipment: Consider leasing rather than purchasing equipment to spread out costs.

2. Profit

Profit is the ultimate goal of any business, making it a crucial metric to track. Unlike turnover, which measures total revenue, profit is the amount left after all expenses are paid. It provides a clear picture of your business's financial performance.

Changes in sales volume, product mix, and pricing affect profit. Regularly tracking profit allows you to identify trends and make necessary adjustments.

To maintain or improve profitability:

Reduce Expenses: Look for cost-saving opportunities.

Increase Sales Volume: Boost sales through marketing or expanding product lines.

Adjust Pricing: Raise prices if the market supports it, ensuring you maintain competitiveness.

If your profits are increasing, analyze what's driving this growth and consider how to replicate it across other business areas.

3. Accounts Payable

Accounts payable represent the money your company owes to suppliers for goods and services. Tracking this metric helps you understand your monthly spending and manage your debts effectively.

To manage accounts payable:

Set Up Payment Schedules: Arrange payment terms with suppliers to align with your cash flow.

Ensure Adequate Cash: Maintain enough cash reserves to cover your payables on time.

Keeping accounts payable low by negotiating favourable terms with suppliers and managing your cash flow effectively can prevent financial strain.

4. Accounts Receivable

Accounts receivable is the money customers owe your company for products or services sold. High accounts receivable can lead to cash flow problems, making it vital to track this metric closely.

Monitor ageing accounts, which are overdue invoices. A high number of ageing accounts indicates potential issues with customer payments.

To improve accounts receivable:

Streamline Invoicing: Ensure invoices are sent promptly and accurately.

Offer Discounts for Early Payment: Encourage customers to pay sooner by offering incentives.

Set Up Payment Plans: Provide flexible payment options to facilitate timely payments.

Effective accounts receivable management ensures you have the cash flow to support your business operations.

In summary, the four key financial metrics to monitor for business success are cash flow, profit, accounts payable, and accounts receivable. By regularly tracking these numbers and adjusting as needed, you can maintain a healthy financial position and drive your business toward sustained growth. This diligent monitoring will enable you to make informed decisions, avoid financial pitfalls, and ensure your business thrives in the long term.