5 financial metrics every small business owner should track

There are five key performance indicators (KPIs) in finance you should focus on when you start a business—your profit margin, cash flow, cost of goods sold, accounts receivable turnover, and current ratio. These business health metrics are helpful for tracking your profitability, how efficiently you’re purchasing goods and receiving payments, and how capable you are of repaying short-term debts.

1. Profit margin

Use your profit margins to calculate the return on investments (ROI) for any of your projects, and help inform your next steps, financially. There are three different types of profit, with slightly different ways to measure them:

• Gross profit is the balance remaining after subtracting production costs from revenue. 
• Net profit is your gross profit minus expenses and costs, including taxes. Also known as net income. 
• Operating profit is your revenue minus cost of goods sold (COGS), operating expenses, depreciation, and amortization.

Gross profit and net profit are revenue growth metrics, while operating profit is a reportable number on your company’s income statement. The first two are internal financial performance indicators. The third is for your shareholders, investors, or—if you’re a publicly traded company—the general public.

2. Cash flow

Cash flow is the lifeblood of every business—if it’s disrupted, your company won’t function properly. You or your accounting team will detail your cash flow in statements covering three following categories: 

• Cash flow from operating activities – buying/selling goods or providing services, daily operations
• Cash flow from investing activities – buying/selling long-term assets
• Cash flow from financing activities – issuing/repurchasing stock, paying dividends

To find each type of cash flow for a period, total that cash flow stream, then subtract that value from your total cash balance at the start of the period. This number is published along with the income statement, balance statement, and statement of shareholder equity.

3. Cost of goods sold (COGS)

Cost of goods sold (COGS) measures the percentage of gross revenue consumed by production costs, such as materials, labor, distribution, and sales costs. Your COGS directly affects your company’s profit margin and growth, and therefore offers insights for cost analysis in business decisions, such as renegotiating with suppliers or finding a new source.

COGS can also justify a small business loan for expansion or restructuring. In some cases, lenders may review your current COGS to see if debt financing is the best solution.

4. Accounts receivable turnover

Accounts receivable turnover measures the time between billing a client and receiving their payment. This metric is important for making sure your inflows cover your outflows—for example, if you have repayments due on a business loan before you receive your next payment. 

Accounts receivable turnover is expressed as a ratio of average monthly accounts receivable to net credit sales for a chosen period. A high turnover ratio means your collection process is efficient, while a low turnover ratio indicates that you need to shorten your accounts receivable process.

5. Current ratio

The current ratio is calculated by dividing your current assets (cash, cash equivalents, accounts receivable, inventory, securities, prepaid liabilities) by current liabilities (debts due within one year). It’s a useful liquidity ratio for assessing your ability to repay short-term debts, which is important when raising money, preparing for an IPO, or applying for a business loan.