Financial statements don’t tell the entire story. Many companies either aren’t monitoring financial ratios or are unsure which ratios to track. Knowing the best financial ratios to focus on helps you judge the strength of your business and provides key insights to investors and banks. Here are seven key metrics you need to track, no matter where you are in the growth cycle.
1. Runway & Burn Rate
For early stage startups two very important metrics for you to track are the burn rate and runway. Given most startups aren’t generating profits, having a good understanding of how much is being spent and how many months the cash in the bank can support are crucial. Not only are these the metrics which are commonly asked for by VCs, but they will also help you strategize around growth, hiring, and fundraising. Having access to runway and burn rate in real-time is an advantage when you are looking to make proactive rather than reactive decisions.
2. Net Cash Flow
Net cash flow refers to either the gain or loss of funds over a period after all debts have been paid. When a business has a surplus of cash after paying all its operating costs, it is said to have a positive cash flow. Having a good handle of the cashflow trend is important for you to evaluate your company’s finances. If net cash flow is trending lower, you may need to find ways to reduce cost.
3. Intra-month Inflow and Outflow
Visualizing monthly spending and understanding how it compares to previous months can help you detect erroneous transactions ahead of time. Additionally, cash flow visualization can be used as a way to gauge the status of the business month over month allowing you to make decisions before the books are closed.
4. Net Profit Margin
Your net profit margin, or simply net margin, shows the amount of net income (profit) that’s generated as a percentage of revenue. Investors can determine if the management is generating enough profits from its sales by looking at the company's profitability.
Here’s how to calculate net profit margin:
(Total revenue - Total expenses) / Total revenue = Net profit margin
Your result measures the amount of profit from each dollar in sales. If your profit margin is 15%, your company keeps $0.15 of every dollar as profit.
5. Quick Ratio
The quick ratio is also known as the acid test. This metric is essential for small businesses with current liabilities, such as accounts payables, short-term loans, credit card debt, payroll or income taxes due, and other accrued debt.
Here’s how to calculate the quick ratio:
(Cash + Market securities + Net accounts receivable) / Current liabilities = Quick ratio
It measures short-term liquidity, and you can use it with the cash flow to debt ratio to give you an even better picture of your company’s liquidity position.
6. Total Aggregated Cash
Most businesses and startups use different accounts for different purposes. This creates some complexity in the way cash is being tracked and reconciled. Having real-time information about how much money is sitting in each bank account, and in aggregate, is critical when making financial decisions. A clear view of your business’ aggregated cash enables you to get access to more granular information such as idle cash. Idle cash can then be put to work earning meaningful revenue via treasury management strategies.
You shouldn’t rely on a single financial metric. Instead, consider each alongside other business ratios to better understand where your company stands financially. Having access to key metrics in real-time is important to making timely decisions.
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