Measuring the business growth is really very important and this growth and performance are expressed through financial concrete numbers. Business financial health is analyzed, monitored and improved through these financial KPIs. KPI refers to the types of markers that business use to measure performance in the variety of fields from marketing, sales to HR and finance. Here are some 5 most important financial metrics to measure your company’s health and performance.
Gross Profit Margin:
This metric tells whether the pricing of the goods or services you are selling is appropriate or not. The mathematical equation is as follows:
Gross profit Margin= (Revenue- Cost of goods/services sold)/Revenue
The gross profit margin should be large enough to help you compensate your operating expenses while still leaving a room for the profit.
2. Net Profit:
Net profit refers to the amount of the cash left over after you have met all your expenses and bills, salaries and the other overheads for operating the business. The equation for calculating your net profit is as below:
Net Profit= Total Revenue – Total Expenses
These reserves are very essential for meeting your personal needs also any unwanted expenses or the business expansion plan in the future. Every business faces the seasonal fluctuation and slow-moving period hence this net profit earned helps you smooth out your needs for the business functioning.
3. Net Profit Margin:
Net profit margins help you evaluate what percentage of your revenue was profit. The mathematical formula to calculate the net profit margin is as follows:
Net Profit Margin = Net Profit/Revenue
4. Aging Accounts Receivable:
If your business invoice sending the recurring bills and invoices to the customers, then Aging account receivable is the best metric to use and evaluate. If a Customer A consistently pays bills within the 10 days, while the customer B, customer C, and Customer D drag their payments out of 90 or even 120 days then your business may suffer from major cash flow. Thus to recover from this cash flow problem, you can start charging the late fee or some interest on the overdue invoices.
5. Current Ratio:
This accounting term refers to the ability of a business to pay its bills. It can be calculated as follow:
Current Ratio = Current Assets/Current Liabilities
The Current Ratio should ideally fall between 1.5 and 3. A current ratio of less than 1 gives an indication that you don’t have enough cash to use it for making other payments like bills. This metric may help you proactively monitor the cash flow problem when the current falls outside the range of 1.5 and 1/
