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StartupsTechnology

Top 13 Great Financial Metrics Every Business Owner Should Know

4 Mins read

Let’s dive into financial Metrics every business owner should know. A business is only as good as the business owner’s mind.

Every organization’s function has an effect on the financial metrics of a company. As a result, every organizational task has some relationship to the company’s financial performance.

Great Financial Metrics every business owner should know

1) Break even

Break-even is the point at which your revenue matches the expenses associated with producing that revenue. Basically, it’s the amount of sales you need to stay in business. It’s calculated by dividing your fixed costs per period by your contribution margin per unit.

2) Net present value (NPV)

This is the difference between the total value of cash inflows and the total cost of cash outflows.

3) Debt to equity ratio

A measure of a company’s financial leverage, calculated by dividing its total liabilities by its stockholder equity (net worth). A debt-to-equity ratio above one indicates more debt than equity; below one indicates more equity than debt. The rationale behind this metric is that less debt will indicate a safer investment.

4) Profit Margin

This is the measure of how much money, per unit of product sold, you have leftover after all expenses have been paid. It is the result of revenue minus all costs.

5) Return on Equity (ROE)

This measures the profit earned as a percentage of equity used to operate the business. It is calculated as net income divided by average shareholders’ equity and is expressed on a yearly or quarterly basis. A high ROE can indicate that a company is doing well with limited capital investment and relative to its competitors. A high ROE also indicates that some other factors are working in favor of the business; for example, employee performance and productivity, or quality and innovation.

6) Variable Costs

These are the costs that are normally affected by the number of products or services produced. For example, cost per unit of production (wages and benefits, plus materials and energy), is a variable cost. The opposite of variable product costs is fixed product costs. Fixed cost are those that remain constant regardless of the quantity of output produced. An example of this type of cost would be depreciation on fixed assets or rent on real estate divided by the square footage used in production.

7) Fixed Product Costs

Fixed Product Costs are those that remain constant even when quantities sold change, such as rent for buildings and equipment. Fixed Product Costs are often referred to as “per unit costs”. An example of this cost would be the portion of building or equipment costs which must be paid regardless of how much is produced.

8) Gross Profit

This is the revenue earned when you sell a product minus the cost of producing it. It is determined by subtracting the cost of goods sold from sales revenues.

9) Rental Expense

Any business that rents office space or equipment will have rental expenses. Businesses that lease equipment need to build this expense into their cash flow because they have that perpetual obligation, even if they no longer own the equipment at some future date. Expenses also include real estate taxes and insurance premiums paid on leased building space or leasehold improvements to leased space

10) Taxes Payable

This reflects the amount owed in taxes for the current year. It is the difference between the amount of taxes accrued to date and the amount of taxes paid. If the expense is a tax payment, you decrease taxes payable. If a payment was made in advance, you increase taxes payable.

11) Accounts Receivable

Accounts receivable includes invoices for goods sold on credit and amounts due from customers for services rendered or goods purchased. It is sales revenue that has been invoiced but not yet collected. Accounts receivable is usually listed with a company’s current liabilities on its balance sheet. This means accounts receivable is money owed to the company, but not yet paid by customers. The collection of accounts receivable is sometimes referred to as the “A/R Cycle” because, like the stages of a biological life cycle, collections typically begin with the “birth” of an invoice and continue through aging until payment.

12) Revenue Recognition

Revenue recognition is the process that determines when a business recognizes revenue. For example, when is a sale recognized? When it is actually received? When it is billed? Or when it is earned? Another word for earned is realized. That’s because you realize (receive) revenue only when you earn it by providing goods or services to customers. Furthermore, there are numerous ways to account for and recognize revenues on your financial statements.

13) Burn Rate

Investors use the burn rate of a company to establish whether or not the business can survive long enough to be successful. The burn rate is the amount of cash a startup uses each month. It’s shown as part of cash flow from operations on the income statement using this formula:

14) Revenue Growth Rate

The growth Rate is how much revenue has increased or decreased over time. This metric, sometimes referred to as “top-line growth”, looks at revenue increase as a percentage over a period of time. For example, if last year your company had $1 billion in revenue and this year it has $1.3 billion, your growth rate would be 30%.

Conclusion

All the above metrics can tell investors and business owners what the future holds for their company. However, the true value of these metrics lies in their ability to help you understand how your company compares to its competitors, or how successful it has been since your start-up in business. This is especially important in an economic downturn when businesses struggle and often need a cash injection to survive.

You might be interested in why you need a technical co-founder for your startup.

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