Six essential financial metrics business owners should be aware of
A number of financial metrics are behind the success of every business. It’s important to be aware of these financial metrics as they provide an insight into the overall position of your business as well as its strengths and weaknesses. Offering high-quality accounting services in Melbourne, SP Solutions is on hand to help business owners to gain a deeper insight into the following financial metrics and how to get the most out of them.
- Days Receivable
Consider how long it takes for customers or clients to pay you compared to the terms of their contracts. Would you be likely to have more cash in the bank if customers paid you on time? If late payments from clients are beginning to cause issues with cash flow, re-evaluate your trading terms and think about how they can be improved to reduce the time taken for clients to pay so that the business has more cash in the bank.
- Net Profit Margin
Paying attention to your profit margin is essential for running a business successfully. It’s vital that your profit margin should always be positive and increasing year upon year. Shifting business operations is a good way to maintain a positive profit margin. Offering accounting services in Melbourne, SP Solutions is on hand to provide business owners with advice on how to increase their profit margin by shifting business operations.
- Working Capital Ratio
Understanding the working capital ratio of your business allows you to better understand its financial position. The working capital ratio is the number of current assets to the number of current liabilities. Ideally, this ratio should be around 2:1, if it’s any more you may be restricting the capital in your business and any less than this may prevent you from accessing vital assets in the case of an emergency. Every business is different, enlist the help of expert business advisory services from SP Solutions to find your ideal working capital ratio.
- Breakeven Sales
Breakeven sales are vital for the survival of any business, however, it is important to remember that the breakeven point changes every time the gross profit margins or overheads of the business are adjusted. Stay aware of this financial metric on a daily basis to set attainable targets for the business. Whether your offering is a product or service, it is essential that you are aware of the numbers of units or hours of work that will be required to breakeven.
- Gross Margin
It’s also vital to continually monitor the gross margin of your business as it is important that this remains consistent over long-periods of time. Factors such as inflation, or a rise in overheads can cause your gross margin to decrease over time if you do not increase the prices for your customers accordingly. A drop in productivity can also have an adverse effect on your gross margin.
Cash is one of the most essential assets of any business. It is fundamental to know how much cash your business has in the bank as this is what is used to pay employees, dividends and suppliers. A good understanding of cash flow and the way in which cash impacts business operations is key to the success of any business as cash is what funds all investments and plans for growth and expansion. Be sure to continually monitor the amount of cash that your business has in the bank for a detailed insight into the financial standing of your business that could allow you to make more strategic business decisions.
Looking to gain a better insight into the financial aspects of your business? Get in touch with SP Solutions offers expert business advisory services designed to help you to take control and get the most out of your business.