Important Small Business Financial Metrics You Need to Know

Article Summary: You don't need to be an accountant to be a successful small business owner, but there are a handful of important small business financial metrics every business owner should know like the back of his, or her, hand. Understanding what these numbers are telling you will help you build a healthy and thriving business.

• Make sure you have a handle on your income
• Do you have control of all of your business expenses?
• Do you know your cash flow metric?
• Are your accounts receivables current?
• Are  you on top of your accounts payable?

Of course these aren't the only metrics you need to pay attention to, but I consider them the top five. Keep reading to learn more.

“I’m not an accountant and although I believe, from my personal experience, that these are some of the more important metrics every business owner needs to be familiar with, you should also speak with your accountant or a trusted financial advisor to see if there are any other metrics he or she feels are more important for your business and get their perspective on what these metrics mean and how you should measure them.”

1. Income: Without business income, or revenue, nothing else happens. Nobody gets paid. Products don’t get delivered. Supplies can’t be purchased. Without revenue, businesses can’t sustain operations. In my opinion, this is one of the first metrics you need to be intimate with. I tracked this number daily, weekly, monthly, quarterly, and annually so I could compare how I was doing today with how my business was doing last year, month, week, etc.
   
   This is an important number to a lender, for example. Because one of the things they are trying to evaluate when they review your loan application is whether or not you have the income to make any periodic payments associated with a potential small business loan, without revenue, your business’ ability to service debt will be considered questionable.
   Fortunately, this is a fairly easy number to capture. What are your total sales?
   
   
2. Expenses: There are several ways to categorize your expenses, and your accountant can help you with those; but ultimately, you want to know what it costs to do business and whether or not your business income is sufficient to meet those business expenses. It’s the difference between your income and expenses that determine if your business is profitable or not. After all, profits should be one of the primary goals of going into business for yourself.
   
   Granted, there are some businesses today (particularly in the tech space) that forego profits in the beginning and focus more on growth. To do this, they rely on investor income, rather than profits, to fuel the fire of growth before they become profitable. That’s how companies like Facebook, Twitter, and Uber became household names. These investors forecasted that their returns would be exponentially greater by investing today for a potential payout down the road. If your small business has the potential to grow and scale profits with the infusion of capital, you are probably considering this, but most small business owners need to focus on selling their goods or services for more than it costs to produce them so they can generate profits.
   
   
3. Cash Flow: Inadequate cash flow has rung the death knell for many small businesses over the years. If you’ve ever heard the term, “Cash flow is king,” this is what it’s talking about. It’s not enough to simply have money in your business checking account at the end of the month; you need to understand your Cash Flow Metric.
   
   You calculate this metric by dividing your assets and your liabilities. This is an important enough metric, that if you’re unsure about how to define assets and liabilities, I encourage you to speak with your accountant to make sure you’re clear on the definitions. The ideal goal for this metric is 2:1, or twice as many assets as liabilities. Understandably, this 2:1 goal is challenging for many businesses to maintain, but anything below 1:1 should be a big red flag that your business doesn’t have adequate cash flow to maintain operations.
   
   This can be an important metric. For example, it should be an important part of consideration when looking at potential business loans. Because the loan payment becomes a liability, if those payments pull your metric down below 1:1, it could indicate that you are borrowing your way into trouble. Having a handle on your cash flow metric is critical to small business success.
   
   
4. Accounts Receivable Aging: This is an important metric that you can’t afford to ignore. How long does it take your customers, to whom you offer credit terms, to pay their invoices? If you offer 30-day terms, do they consistently pay in 30 days or do they sometimes go 45 or 60 days.
   
   In my business, after 45 days I started to lose whatever profit was in an invoice and after 65 days my profits were entirely gone because of the impact it had on my cash flow. What’s more, for every day over 40 days an invoice was late, it became more difficult to collect. (These timeframes might not apply to your particular business, but it’s worth investigating your situation to determine these numbers for your business.)
   
   Needless to say, I worked very hard to ensure that my customers stayed current, and even encouraged them to pay early by offering them a discount on their invoice if they paid within 10 days. Those that took advantage of the discount helped my business by giving me 20 extra days to use that income to increase profits—in other words, the discount was worth it to me.
   
   
5. Accounts Payable Aging: Another number you should know is the average number of days it takes you to meet your business’ financial obligations. If you’re able to effectively manage your Accounts Receivable, your cash flow, and your income, you should be able to keep your accounts payable current and maybe even take advantage of the prompt payment terms you’re suppliers likely offer you.
   
   I know of several small business owners who save enough money by paying their suppliers early and taking the offered discount that they take a big chunk out of payroll every month with the savings. What’s more, if you’re looking at your income and expenses, the ability to take that discount may even positively impact your profitability.
   
   As a business looking for borrowed capital, the single most important thing you can do to positively impact your business credit rating and increase the options you’ll have when it comes time to borrow is staying current with your business credit obligations. That includes you utility bills, your business lease, your credit relationships with vendors, and any other business credit obligation you may have.