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12 Business Metrics That You Need to Know
You cannot monitor your business’s health if you don’t understand your key financial metrics.
You risk mingling assets, incurring penalties for filing taxes late, overlooking expenses, and running into difficulties paying bills and employees—just to name a few.
Successful business owners analyze data to understand exactly how their business is doing. They use this information to inform their goals, track progress, and make necessary adjustments.
But which metrics should you pay attention to? Here are a few of the most valuable.
1. Cash flow
Cash flow measures the money moving in and out of your bank accounts. Cash you pay out is negative cash flow, and cash that comes into your business is positive cash flow.
The most important thing about cash flow is that it isn’t profits.
2. Accounts payable
Accounts payable is the total of the bills you have to pay but haven’t paid yet. This is a business’s short-term debt that must be paid. In your company’s financial statements, accounts payable will show up on your balance sheet as a liability.
It’s important to track this metric to manage your cash flow. After all, if you can’t manage your debts, you could risk defaulting.
3. Accounts receivable
Accounts receivable is money that is owed to you by your customers for products or services that you’ve sold. Because this metric shows as an asset on your financial statements, it’s especially important to be aware of it.
Remember, this is not money in the bank, but money owed to your business. Encouraging customers to pay invoices faster will decrease your chance of getting into a “cash crunch.”
4. Direct costs
Direct costs—also known as “costs of goods sold”—are the costs that can be completely attributed to the production of a specific product or service. These costs include the cost of materials used to create the product and potentially any labor costs exclusively used to create it.
Direct costs always exclude indirect expenses such as marketing expenses, rent, insurance and so on. Direct costs show up on the profit and loss statement and can be subtracted from revenue to calculate a company’s gross margin.
5. Cash burn rate and runway
Cash burn rate is the rate at which a company uses up its cash reserves or balance. This metric is designed to show how fast you’re burning through your cash reserves or maintaining a healthy balance from positive cash flow.
Your runway is simply how long your business can last at its current burn rate.
6. Net profit
Net profit is your operating income minus taxes and interest. It is the proverbial bottom line of your business; the money you make that doesn’t go back into expenses, taxes, and interest—the net profit that is left over.
7. Gross margin
Gross margin is the difference between what it costs to make what you sell and the revenue you generate.
It shows how efficient your business is. There may be opportunities to decrease costs or increase prices to improve your gross margin.
8. Lifetime value (LTV)
Lifetime value is the average monetary value of a customer for however long they decide to remain your customer. This may be a one-time purchase, repeated subscription, or disparate follow-ups over a set period of time.
It can be difficult to measure this metric when you’re first starting out. But you can leverage your sales forecast to effectively predict what you expect a customer’s LTV to be.
9. Customer acquisition costs (CAC)
Your customer acquisition cost is how much you need to spend in order to gain the business of a single customer. It’s typically far more expensive to acquire customers than retain them. Focus on finding ways to shrink the costs associated with new customers and engage your current customers in order to keep them around.
10. Cash-assets ratio
The cash-assets ratio is the current value of cash and cash equivalents divided by your liabilities. It’s a key measure of liquidity and one of several coverage ratios that tell creditors about a company’s likelihood of default.
It indicates how much flexibility a business has in using cash or accessing liquid accounts to make good investments or cover expenses.
A company with its cash tied up in accounts receivable and inventory (a low cash-assets ratio) might not have enough cash to keep the lights on, much less ramp up production if sales accelerate.
Cash is king, and you want to be sure you have enough to cover liabilities and hold a strong cash runway should a crisis occur. For any banks or investors, this helps them understand the risk of investing in your business.
11. EBITDA-assets ratio
EBITDA, or earnings before interest, taxes, depreciation, and amortization, is often used to measure the ability to generate income. This is your operating income, and it can help you find things like your profit margin by dividing by revenue.
It’s widely used as a substitute for pre-interest, pre-tax cash flow from operations. It tells you what you have left over after subtracting expenses and can tell you how profitable you are.
Comparing EBITDA to a company’s assets helps show efficiency. How much income, or cash, a company can generate from its equipment, property, and other assets.
12. Debt service coverage ratio
The debt service coverage ratio can be found by dividing EBITDA by a current portion of long-term debt and interest expense. This is just a measurement of your business’s ability to pay current debt obligations based on your cash position and operating income.
It is an extremely important metric for predicting if you’ll default on a loan.
Tracking the right metrics keeps you focused on growth
Tracking and analyzing key business metrics like these makes the decision-making process that much easier. Knowing how you’re performing allows you to take action that is important to continued growth and even the survival of your business.
Check out our other business management resources to learn where you can apply your business metrics: