Managing a small business successfully involves keeping a close eye on the financial pulse of the enterprise. As small business advisors, we use these financial metrics to help steer a business towards growth and stability. Monitoring these metrics not only helps in making informed decisions but also in anticipating financial challenges. Here are 10 financial metrics small businesses should keep track of:

1. Cash Flow

Cash is still king and monitoring your cash flow is one of the most important ways to determine how your business is doing. Cash flow is the net amount of cash being transferred into and out of a business. It is crucial for the day-to-day operations, helping you understand how much money is available to cover expenses like payroll, rent, and inventory purchases. Positive cash flow means that a business’s liquid assets are increasing, enabling it to settle debts, reinvest in the business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. However, that cash flow can look good while the business is suffering if you are injecting cash through debt or using deposits on future jobs for current day expenses.

2. Profit Margins

Profit margin, both gross and net, is a financial metric that measures your business’s profitability. The gross profit margin indicates the percentage of revenue that exceeds the cost of goods sold (COGS), while the net profit margin reflects the percentage of revenue remaining after all operating expenses, taxes, and interest payments are deducted. These metrics help assess the efficiency of your business operations and pricing strategies.

3. Debt-to-Equity Ratio

The debt-to-equity ratio is a measure of the relative proportion of shareholders’ equity and debt used to finance a company’s assets. This ratio is important because it provides insights into the financial structure of your business and helps you understand the level of risk involved in your financial practices. A lower ratio generally implies a more financially stable business.

4. Accounts Receivable Turnover

This metric measures how efficiently your business collects cash from its credit customers. It is calculated by dividing total sales by the average accounts receivable during a period. A higher turnover ratio indicates that your company is effective at collecting its receivables and is managing its credit terms efficiently. If you start seeing this increase, it is important to focus on your collection efforts so you can maintain positive cash flow.

5. Inventory Turnover

Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a given period. This metric helps businesses make better decisions about pricing, manufacturing, marketing, and purchasing new inventory. High turnover indicates that you’re selling goods rapidly, while low turnover may suggest overstocking or inefficiencies in the product line or marketing.

6. Return on Investment (ROI)

ROI measures the gain or loss generated on an investment relative to the amount of money invested. ROI should be used in two different ways. One way is to understand how your business is performing compared to the other uses of your capital and time. The other way is to understand the efficiency of different investments within your business. Whether it’s a new piece of equipment, a marketing campaign, or a new product line, knowing your ROI can help prioritize resources effectively.