Are you a small business owner? Or a sole trader? A freelancer, perhaps?
Either way, then you probably already know that finances can make or break your business.
There’s a common saying that most startups (9 out of 10) usually end up failing. But do you know why this happens?
You guessed right. The finances.
That is why in this guide we’ll be looking at some of the important financial numbers you might want to keep an eye on if you want your business to survive.
1. The Cash Flow
Do you want to know how to save money in your business? Know where the main source of cash is coming from and to?
Then the cash flow statement is the ideal place to start.
Your cash flow statement allows you to see the bigger picture of the finance side of things in your business. And it’s one of the more important financial statements as far as measuring your business finances go.
Essentially, the cash flow statement reports the sources of cash in three main categories. And they are as follows:
- Operating activities – these are your primary means through which you generate revenue (from sales, accounts receivable, etc.) and your expenses.
- Investing activities – these are the less common sources of cash, especially for small businesses, but generally also include buying and selling assets.
- Financing activities – these cash flows come from changes in equity and borrowing.
In order to remain a business, you must have a positive level of cash flow – so, start there.
2. The Net Income
Aka the bottom line.
This is what it boils down to:
Are you losing more money than you’re making?
If you want to know whether or not you’re losing money – simply subtract the cost of doing business from your revenues.
Net income represents the amount of money left over from all the business operational expenses, interest, taxes, and more.
This is one of the most closely followed numbers in finance simply due to the fact it’s the main source of compensation to the shareholders of the company. And if the company cannot generate enough profit to compensate the owners – the value of the shares will plummet along with the business.
When looking at the net income, it’s important to note that net income is not a measure of how much cash a company earned during a given period. Depending on the type of business and its structure, the net income also includes non-cash expenses and amortization.
If you want to know where your business is heading and how – be sure to calculate your net income monthly.
3. Gross Margin
Also called the sales profit or gross profit, this financial number is used to check a company’s profitability. More specifically, it’s the profitability that companies make after deducting the cost of goods sold.
Here’s how that works:
Gross profit = revenue – cost of goods sold
It’s basically a measurement of how much money your company has left over after all the fixed and variable costs of production are subtracted from your net sales.
The reason it’s so important though is because it’s the starting point to achieving a healthy bottom line net profit.
In other words, when you have a high gross profit margin, you’re in a better position to scale up your small business.
4. The Return on Investment (ROI)
This is a fairly straightforward financial term but an important one nonetheless. Essentially, it measures if your investment paid off from a business standpoint.
ROI = (gain from investment – cost of investment) / cost of investment
Though that may be the case, it can be applied to practically any business department, even marketing, and HR. Knowing your investment is an essential part of any business and can change the course of any project.
If you’re wasting money on an expense and the project isn’t likely to pay off, obviously it’s a good idea to call it off. Possibly the most obvious insight you’ll gain from measuring your ROI is where you should be spending money, and how much.
And if you discover one specific field that’s not worth the ROI, it’s worth exploring other segments. Since you can calculate the returns on any project, the return on investment is an essential financial number when it comes to allocating funds and expenses efficiently.
5. Revenue Growth
We already discussed the net profit margin, so, think of revenue growth as a tool to service it.
If you want your business to keep growing, you might want to keep an eye on your revenue growth.
Revenue growth is simply the percent growth in your company’s sales, usually compared to previous quarters’ revenue performance. And at the end of the day, the purpose of a business is to make a profit. So, by accelerating the main driver behind profit (revenue growth), you can create even more sources of revenue and re-invest back in your business.
In short, knowing whether or not your company is succeeding is usually demonstrated by growth in revenue. And obtaining growth in revenue is a sure way to tell if everyone is doing their job well enough to make a difference.
As important as profit is, revenue growth can tell if your whole business and your employees are on the right track (compared to a previous quarter).
And if your revenue is growing, your company is likely to be growing as well!
Guest Author Bio
Uwe is the founder of online invoicing software InvoiceBerry. Small businesses and sole traders can create, send and manage their invoices, quotes and credit notes with the tool. In his free time, Uwe travels the world and enjoys experiencing different cultures.