Running a successful business is both an art and a science. Yes, it’s important to have a great product and an excellent marketing strategy. But if you’re not tracking the right financial metrics, you may find it hard to reach your growth goals or even remain solvent.

Let’s take a closer look at the importance of tracking financial metrics and which ones business owners should be focused on.

The Importance of Tracking Financial Metrics for Business Owners

Smart money management is what separates a successful business from a failed one. While money management has many moving parts, tracking financial metrics is an important one.

Monitoring your financial metrics gives you valuable insights into your business’s performance and allows you to find:

• Growth opportunities
• Areas for improvement

Financial metrics also help you understand whether you have enough cash to invest in growth, or whether you need to cut expenses to stay solvent.

The Role of Financial Metrics in Decision-Making and Business Success

If you want to run a successful business, you have to do more than just hope for the best. Making decisions based on data – not your gut instinct – will produce the best outcome.

When it comes to decisions like investing in growth or hiring new staff, it’s crucial to let your financial metrics be your guide.

Metrics help you focus on your most important assets and pinpoint areas of improvement. They drive your marketing and financial strategies, too.

Tracking the right metrics can help you understand:

• Which targets you reached
• Which targets you missed
• Which areas can be improved
• Whether you’re on track to reach your future goals
• Your past performance and how it affects your business today

Data-based decision making is all about using metrics to guide your decisions and ensure they align with your goals and initiatives. Taking this approach can lead to business success.

Key Financial Metrics to Track

What are key metrics in business? It depends on the industry. You may follow one metric more than another, but there are five financial metrics that you can be confident every owner follows to understand the health of their company.

1. Revenue

Revenue metrics are often the most exciting because they show how the company generates its money over time. You can use this figure as a loose indication of business growth, but it leaves off profits, which can be negative even if you have a revenue increase.

You can and should monitor:

• Gross revenue from operations
• Monthly recurring revenue if you offer a subscription-based service

For example, a software-as-a-service company may monitor their monthly recurring revenue because it’s a better indicator of growth than revenue for the business model. In addition to your revenue, you’ll need to know your gross profit margin.

2. Gross Profit Margin

Gross profit margin helps you find the financial health of your operations. You’ll need to determine this figure using the following data points:

• Net sales
• Cost of goods sold

You’ll be able to determine your gross profits by: (net sales – cost of goods sold) / net sales.

Gross profit margins do not account for important information, such as the costs of selling the goods. You may have $20 in gross profit margins for a good, but due to employee hours necessary to make the sale, profits fall to a true value of $4.

3. Net Profit Margin

You can calculate your net profit margin by using the following calculation: (net income / net sales) * 100. The net profit margin metric is a way to understand your total percentage of profit using total revenue.

Unlike gross profit margins, the net profit margin considers all expenses, so it’s a better indicator of the financial health of your business.

If you have a negative profit margin, it is an indicator that your business spends more money than it’s taking in. Drastic changes are necessary to keep operations running if you’re in the negative.

4. Return on Investment (ROI)

If your business is investing in growth or making any kind of investment, it’s important to track your return.

Return on investment, or ROI, is a metric used to evaluate an investment’s performance and is expressed as a percentage.

To calculate your ROI, divide the investment’s net profit or loss by its initial cost. The answer will give you a general idea of the investment’s profitability and whether it’s improving or harming your growth.

5. Cash Flow

Cash flow is one of the most important metrics a business can track. Why? Because positive cash flow is crucial to the survival of your business.

If your company isn’t generating enough cash flow to cover its expenses, then you won’t be in business for long.

Cash flow refers to the movement of cash into (income) and out of (expenses) a business.

Make sure that you’re tracking your:

• Free cash flow
• Operational cash flow
• Working capital

If you find that your cash flow is in the negative, you can take steps now to reverse this trend and get your business back on the right track. For example, negotiating more favorable payment terms with vendors or cutting back on expenses can help improve your cash flow.