In order to run a business successfully, there are certain metrics that you need to keep in mind. These include performance information, industry trends, and laws/regulations. However, there are also key financial metrics that you need to consider in order to ensure the long-term success of your company.
Let’s take a look at some of the most notable.
1. Cash Flow
For those who are unaware, cash flow is the amount of money that moves in/out of the business during a specific period.
Having a strong understanding of cash flow can provide insight into the performance of your company. It could also help identify peak seasons or problem areas. So, be sure that you take this into consideration when moving forward.
2. Profitability Ratio
Interestingly, some entrepreneurs don’t understand the difference between revenue and profit. Put simply, revenue is the amount of money that your business generates, while profit is the amount of money left over after you pay your necessary expenses. These include employee compensation, materials, etc.
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A profitability ratio helps determine a company’s ability to generate profit compared to its revenue. Having a substantial profitability ratio can help you secure more investors and keep your current shareholders content.
3. Income Sources
Most businesses have a variety of different income sources.
However, not all of these income sources are equal. This means it’s in your best interest to have a comprehensive understanding of the different ways that your business makes money. From here, you can double down on those that are profitable and rework those that need more improvement.
Business accounting software can easily help you manage your company finances. You can continue reading about it here.
4. Revenue Concentration
This term refers to how revenue is allocated across your different clients or customers. For example, a small business that provides consulting services might receive 50% of its overall revenue from a single client. As you might guess, this can easily cause complications in the future if this professional relationship dissolves.
In general, it’s much better to have a low customer revenue concentration so that your business will remain stable even if you lose some of your bigger clients.
5. Working Capital
Your working capital is the amount of money you have access to through various sources, such as bank loans. It’s essential to have access to a large amount of working capital in order to invest in various areas of your business.
Otherwise, you might find yourself unable to take advantage of opportunities that come your way.
Understanding Key Financial Metrics Might Seem Difficult
However, you need to do so if you want your company to be successful. Keep the above key financial metrics in mind to help ensure that your business stays on the right track.
Looking for more tips that can help you out later on? Check out the rest of our blog for plenty of more useful information.