Key Financial Metrics Every Business Owner Should Monitor

What financial metrics do you monitor? As a business owner, you can’t ignore the importance of financial metrics. They can provide invaluable insight that can help you make smarter business-related decisions. Some financial metrics, however, are more useful than others. Here are some of the top financial metrics that every business owner should monitor to ensure their long-term future success.

Gross Profit Margin

Gross profit margin is a financial metric for profitability. It’s the percentage of your business’s total revenue that exceeds the cost of production. You can calculate it by taking your business’s cost of goods sold (COGS) and subtracting that number from your business’s total revenue. After converting the final number into a percentage, you’ll have your business’s gross profit margin.

Net Profit Margin

Even if you monitor your business’s gross profit margin, you should still monitor its net profit margin. Net profit margin is a financial metric for profitability as well, but it takes into account all business-related expenses. You can calculate it by taking your business’s net profit and dividing that number by your business’s revenue. After multiplying this new number by 100, you’ll have your business’s net profit margin. Because it takes into account all of your business’s expenses — as opposed to only your business’s COGS — net profit margin is arguably more important than gross profit margin.

Debt-to-Equity Ratio

Another financial metric all business owners should monitor is debt-to-equity ratio. As the name suggests, this represents your business’s debt relative to its equity. Nearly all businesses have a combination of debt and equity. The more debt your business has relative to its equity, the higher your business’s debt-to-equity ratio will be. You should typically strive for a debt-to-equity ratio of 2.5 or less.

Cash Burn Rate

All business owners should monitor their cash burn rate. This financial metric represents the rate at which your business spends or uses its cash reserves. New businesses often have a high cash burn rate. They spend their cash reserves quickly to accommodate their growth.

Inventory Turnover Ratio

Inventory turnover ratio is an important financial metric for businesses. It represents how many times your business “turns over” its inventory relative to your business’s COGS during a specific period. You want to sell your business’s products or services as quickly as possible. Inventory turnover ratio can give you a better understanding of the speed at which you sell or “turn over” your business’s inventory.

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