When you’re running your business, having the discipline to keep track of financials might be tough, as there are seemingly a thousand other things you have to do on any given day. However, analyzing relevant business information is vital in order to grow your business.
Identifying and understanding the right financial metrics enables you to see if your company is going in the right direction.
To start, let’s tackle a few of the most important financial metrics for your business. They are quite simple to calculate and you don’t have to be a financial wizard to apply them to your business.
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Sales Revenue
This is quite a broad measure, as sales include anything you sell minus returned products or service. When looking at your sales revenues, you should also look at the costs that you’ve made to sell these products. For example: advertising campaigns. A more concrete measures is Return on Sales (which measures your company’s operational efficiency) and is calculated as: net income (before interest and tax) / sales. Similarly, Return on Assets measures how efficiently you’re using assets to generate earnings and is calculated as: net income (before interest and tax) / total assets. This calculation helps you put the profit you make into perspective.
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Revenue Growth
Revenue growth shows the potential of your he business and indicates how quickly your business is likely to grow under the current conditions. This metric will tell you how fast (or slow) your business is expanding and it can help investors identify trends. Rather than taking a snapshot of your business’ revenue, you look at the growth of revenue over time. The formula for the revenue growth is rather simple: (revenue this year) / (revenue last year) -1.
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Cost of Customer Acquisition
How much did that new customer cost you? This metric helps you decipher the total cost per acquired customer and is an essential metric for every business. With every activity you undertake in order to expand your customer base, you have to to calculate how much money (and time) you’ve spent. This determines whether the money you put in social media marketing or your lasts email marketing campaign was worth it. CoCA is calculated by: total costs associated with customer acquisition (over a given period) / the number of customers acquired. (Note: Consider industry averages to put your numbers into perspective.)
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Net Income
Net Income is the bottom line of your financial statement and illustrates the profitability of your company. Net income is calculated by taking revenues and subtracting all production costs, other costs, depreciation, taxes and so on. This financial metric is called burn rate when a startup’s net income is negative. Although profit might seem to be the most important metric, investors consider much more than net income alone. Gross margin and operating income (income before depreciation and taxes) say a lot about your company’s financial health. Your business might not be profitable at the current moment, but could have huge potential in the future.
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Gross Margin
The gross margin expresses the margin a company makes on each product sold and is calculated as: (total revenues – the cost of goods sold (COGS)) / total revenue. Ideally, if sales volume grows, COGS should go down, efficiency should increase and this should result in a higher gross margin as well. (Note: average gross margins differ heavily per industry, and other costs like administrative and personnel costs need to be factored in.). Ultimately, gross margin is an important measure as it gives you an indication of the likelihood to reach break-even and whether prices are too low or direct costs are too high.
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Salaries
We’ve included this one because salaries turn out to be the largest expense for most companies. If salaries and compensation is too low, your employee turnover will increase – employees will leave the company. On the other hand, if you pay your employees too much, this impacts the profitability of your company. Your employees must feel appreciated and rewarded by their compensation, but the amount paid should be in line with the role and anticipated tasks.
A key take-away from this article is to look at all financial metrics in perspective. What does a Return on Assets of 1.5 mean, if your competitors have 1.7? It is therefore crucial to compare your current results with your results a year ago, and the results of similar companies in your industry. Only then will you be able to gain full insight into the performance of your business and what your results actually mean in terms of potential.
This article has been edited and condensed.
Daisy de Vries is the Marketing & Communication manager at Equidam, an online value management tool for small businesses. Her passions are startups, writing and technologies. Keep investors up-to-date in a consistent and efficient way with the Equidam valuation report. The report gives a clear overview of the performance of your company and enables you and your capital providers to understand and manage the value of your business. Connect with @equidamtweets on Twitter.
Equidam helps entrepreneurs with the process of growing their business, by providing an objective and easy-to-use valuation tool for startups and SME owners. In only 30 minutes, you will have a complete financial picture of your company, which you can use to track your performance, to attract investors or to send regular updates to stakeholders. Take a quick tour to see what we do for entrepreneurs like you.
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