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3 Key Financial Metrics for Tracking Your Business Health

The past couple of years has seen a huge increase in the number of people who are starting their own businesses. Many people have experienced great levels of uncertainty. This has encouraged them to pursue their dreams and build their financial independence.

If you are a new business owner, you know that there are a million things to keep track of. From marketing and advertising to inventory and operations, you’re doing it all.

With all this to do, it’s easy to get behind on accounting practices. However, keeping a few key financial metrics in mind will set your business up for success for years to come.

If the thought of tracking finances makes you want to run for the hills, don’t worry. Keep reading to learn a few easy financial metrics you should follow to help you start tracking your KPIs.

Operating Cash Flow

The best move for maintaining the financial health of your business would be to learn some basic accounting principles (you can read more about the benefits of doing this at https://cassmerward.com/5-incredible-benefits-of-learning-accounting-for-your-small-business/). Until you build up these skills, an excellent first step is to start tracking the operating cash flow of your business.

This is the best metric to track to determine the short-term financial health of your business. Operating cash flow, as the name suggests, tracks the amount of money going into and out of the business based upon its daily operations.

This includes money coming in from the sale of goods and services. It also includes money going out to purchase tools or equipment essential to providing those services.

This metric is usually reported monthly or quarterly, and it doesn’t take assets or liabilities into account. Therefore, it should be used in combination with the other metrics listed here.

Assets and Liabilities

To gain a more in-depth view of the financial position of your business, examine the assets and liabilities that the company holds. Assets are anything of value that belongs to the company, like land, buildings, and inventory. Liabilities are anything that the company owes money on, like a loan, mortgage, or another form of debt.

Comparing the monetary value of your company’s assets and liabilities shows how much money the company actually holds. The comparison of total assets to total liabilities is sometimes referred to as the current ratio. Banks use this to determine the business’s loan eligibility.

The comparison between just the current assets and current liabilities of your company is referred to as working capital. Any assets and liabilities that will be resolved within the next year are current. Inventory that is for sale, debts that are nearly paid in full, and investments that you could sell if needed are all examples of this.

This figure is helpful for knowing how much cash your business could make in a short time frame if it ever needed to.

Debt to Income Ratio

As the name suggests, the debt to income ratio compares the amount of money owed by your company to the amount of revenue that your company makes per month. This figure shows potential lenders how much of your current income you dedicate to paying off your current debts. It is a key consideration in whether a lender will give your company more loan capital.

Sometimes, your debt to cash flow ratio is used for this purpose instead. Using cash flow instead of income can show lenders exactly how much money you have left at the end of the month. Some lenders believe this gives them a more accurate picture of your business’s ability to pay back loans.

Use These Key Financial Metrics to Measure the Health of Your Business

Now you know three key financial metrics that you should be tracking for your business. Use these financial metrics to keep an eye on your cash flow. Staying informed on your business’s finances puts you in a strong position to make smart money choices in the future.

Interested in developing other small business skills? Check out our other articles about all aspects of business and technology.

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