Track your business’s financial health with these five key metrics

Running a successful business means keeping a close eye on your company’s financial health. This can be effectively monitored with the right financial data.

Tracking the correct metrics isn’t just about keeping your books in order – it’s about discovering the strategic insights that drive smarter business decisions.

Financial data offers a clear picture of where your business stands and where it could go with optimised expenditure, reduced costs, and opportunities for reinvestment.

By focusing on these five key metrics, you can identify strengths to build on and weaknesses to address, ensuring your business maximises its financial well-being and long-term profitability.

Break-even point

Breaking even is an exciting milestone for any business – particularly if you are new to the entrepreneurial market.

This is the point at which your revenue is sufficient to cover total costs.

Achieving this milestone doesn’t typically happen for a few months or even years, depending on your business model and market conditions.

Forecasting when you are likely to reach the break-even point can help you to allocate your resources appropriately, whether it’s investing in marketing to boost sales or optimising operational efficiencies to reduce costs.

Cash flow

Cash flow is at the centre of commercial finance metrics. It is a strong indicator of overall the financial health and operational efficiency of the business.

Calculated as the net amount of cash moving into and out of your business, good cash flow ensures that your business can meet debts and other financial liabilities with its existing assets.

For instance, if a company consistently generates positive cash flow from its operations, it demonstrates that it has enough liquidity to cover expenses and invest in growth opportunities without relying heavily on external financing.

Current ratio

Similar to cash flow, the current ratio refers to your company’s ability to meet short-term obligations with liquid assets.

A ratio above one indicates that your liquid assets exceed expected liabilities, reducing the risk of defaulting on repayments or other costs.

For instance, if a company has a current ratio of 1.5, it means that for every pound of current liabilities, it has £1.50 in current assets available, providing a comfortable buffer to handle short-term financial obligations

Profit margins

Your profit margin is a straightforward measure showing how profitable your business is at any given time. The profit margin of your business can be calculated by simply taking your total revenue and subtracting your total costs.

A high-profit margin typically indicates that your business manages its costs well and keeps expenditure to a minimum, while a low margin suggests a need to reduce or manage costs.

However, your profit margin can be impacted by many variables, some of which are out of your direct control your control, for instance, your supply chain, the market you operate in and the product or service you provide.

Staff costs

Managing staff costs can be a significant challenge, especially for businesses that rely heavily on labour.

Understanding staff costs as a percentage of revenue reveals the portion of your total income allocated to wages and salaries. This percentage is calculated by dividing staff costs by revenue and multiplying by 100.

For instance, if a software provider has an annual revenue of £2 million and spends £400,000 on staff costs (including salaries, benefits etc.), the staff costs as a percentage of revenue would be 20 per cent.

This insight is crucial for making informed decisions about cost-reduction strategies or expanding your workforce within budget constraints.

Whether you’re looking to streamline operations or scale up your team, keeping a close eye on this metric helps ensure financial sustainability and operational efficiency.

For assistance in monitoring essential financial metrics for your business and advice on your growth strategy, please get in touch with our team.

Posted in blog, Business, Business Advice, SME's.