Financial Metrics are the difference between a successful business and an unsuccessful business.
What’s the difference between a successful business and an unsuccessful business?
You might think that the answer is to be found in product, customer service, sales sequences, or even marketing. The real answer? Tracking your financial metrics.
But finance is more than asking the question “how much money did we make?” It’s more helpful to think of your business finances as an indicator of your success, trajectory, and longevity.
Taking a look at your finances (and analyzing them) can help you to understand what’s going right, what’s going wrong, and also if there are opportunities for growth within your business.
A thorough understanding of your finances is ESSENTIAL for your success. But if you’re not a pro, it can be daunting to know where to start. Let’s talk metrics.
What is a financial metric?
To put it simply, a financial metric is a way of measuring your business’s “financial performance” or “health”.
- Financial performance: How much money your business makes vs. how much it loses to expenses.
- Financial health: Your business’s stability, profitability, efficiency, and potential.
Why are financial metrics important?
Think of metric tracking like keeping score in a game – it tells you if you’re winning or losing, and helps you to figure out what you need to do to improve.
Here are some key benefits to tracking your metrics:
- Visibility – They show you how much money you’re making, how much you’re spending, and where you’re facing challenges.
- Decision Making – By understanding your financial position you can more easily make informed decisions about things like pricing, investments, and budgeting.
- Risk Management – Metrics help you identify potential risks and vulnerabilities before you stumble upon them! Think of major red flags like debt, declining sales, or cash flow problems. Seeing these coming will help you navigate around them and ultimately save your business.
- Stakeholders – Financial metrics become a common language between you and stakeholders (investors, lenders, even employees). You can more easily communicate success or failure when you use metrics as a communication tool.
Read more about why metrics are important to business survival, here: https://online.hbs.edu
What financial metrics should you track for businesses?
Revenue
Start with the basics. Revenue is the total income generated from sales of goods/services before your expenses are deducted.
- ARR = Annual Recurring Revenue
- How much money your business makes every year
- MRR = Monthly Recurring Revenue
- How much money your business makes every month
Gross Profit Margin
Gross Profit Margin (GPM) is the percentage of revenue that exceeds the cost of goods sold – also known as C.O.G.S! Essentially this metric measures how efficiently your business produces its goods/services.
Net Profit Margin
Net Profit Margin (NPM) is the percentage of revenue that remains after all your expenses – including taxes and interest – have been deducted. It reflects your business’s profitability after accounting for all costs.
Return on Investment
Return on investment (ROI) is a measure of the profitability of an investment relative to its cost. It indicates how much profit is generated from each dollar invested. Keep in mind that an investment can be anything from hiring a new employee to executing on a business expansion plan.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
E.B.I.T.D.A represents your business’s earnings before deducting taxes, asset depreciation and amortization expenses. It provides a measure of operating performance and cash flow.
Debt-to-Equity Ratio
Debt-to-Equity ratio compares your business’s total debt to your shareholders’ equity. It indicates the proportion of financing provided by debt relative to equity and assesses your financial leverage and risk.
Current Ratio
Current Ratio is a liquidity ratio that compares your business’s current assets to its current liabilities. Essentially, it measures your business’s ability to cover its short-term liabilities with its short-term assets.
Cash Flow from Operations
Cash Flow from Operations represents the cash generated or consumed by your business’s core business operations, excluding financing and investing activities. It reflects your ability to generate cash from primary activities.
Working capital
Working Capital is the difference between a company’s current assets and current liabilities. It measures your business’s liquidity and ability to meet short-term financial obligations.
Customer Acquisition Cost
Customer Acquisition Cost (CAC) is the cost incurred by your business to acquire a new customer. It includes all expenses related to sales and marketing efforts.
Customer Lifetime Value
Customer Lifetime Value (CLV) is the total revenue expected to be generated from a customer over the entire duration of their relationship with your business. This metric helps assess the long-term value of acquiring and retaining customers.
Churn Rate
Churn Rate is the percentage of customers who stop using your business’s product or service within a given period. It measures customer attrition and retention, providing insights into customer satisfaction and loyalty.
How to track financial metrics
To a brand new business owner, these twelve simple metrics can seem like an overwhelming amount of information to keep on top of. Especially when you’re spending most of your time making sales and developing your business.
That’s exactly why we created Pluvo. We want to make it possible for business owners of all levels of financial literacy to be able to make steadfast decisions that a solid financial foundation affords, without any of the hassle.
With Pluvo you gain access to a suite of financial planning and analysis tools that empower you with instant reporting and forecasting of your business expenses, revenue, growth and more!
Our roadmap will expand Pluvo into the ultimate business planning tool.
Start tracking your metrics with a zero-hassle custom built tool
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