Successful business owners have one important thing in common. They all have a clear sense of their financial bottom line. They know exactly how well the company is doing and where it needs to be. So, whether you’re a budding entrepreneur with a startup enterprise or a long-established business, it’s essential that you also have a firm grip on your company’s financials if you want to achieve long-term success. But with so much data and information available, how do you know which is the important stuff? Well, in this article we identify the six key metrics that every business owner needs to have at their fingertips.

1.       Gross Profit Margin

This measures how profitably a business sells its products and services. Essentially, it represents the mark-up on your product or service. Working out your gross profit margin is straightforward with the following calculation:

Gross Profit

Sales

And it’s a good idea to have this information available for all product lines as well as at the overall company level.

2.       Stock Turn

This measure tells you how many days it takes you to sell your stock. The lower the number the better as no business wants to have all their money tied up in too much stock or stock that simply isn’t selling. Use the following calculation to determine stock turn in your business:

Average Stock Value x 365

Total Credit Sales

3.       Debtor Days

Do you know how many days it takes your business to collect its payments due? That’s what debtor days means. A high number could be an early warning sign of cash flow problems. Keep your payment terms short and swiftly follow-up on any unpaid invoices to maximise your cash flow. Work out your debtor days with the following calculation:

Average Debtor days x 365

Total Debtor Sales

4.       Creditor Days

As you would expect, this indicator measures how many days it takes your business to pay its bills. A high number of days is another indicator of potential issues with cash flow management. In addition, persistent late payment is likely to see your creditors increase the price of their goods to compensate. To calculate your creditor days use the following equation:

Average Creditors x 365

Total Credit Sales

5.       Interest Coverage

This is a measure of how easily a business can pay its interest expenses on any outstanding debt. A result under 1 once again could suggest that the business doesn’t have enough cash flow to pay interest. The ideal result is a figure over 1.5. Work out what your result is with the following calculation:

Earnings Before Interest and Tax

Interest Expense

6.       Current Ratio

The final indicator that every business needs to know is current ratio. This measures your ability to pay short-term debts from cash reserves. A result of less than 1 could be an indication of cash flow difficulties, and a figure higher than 1 suggests that you might have too much cash elsewhere or that you are carrying too much stock. Find out your current ratio with this equation:

Current Assets

Current Liabilities

If your company doesn’t yet collect this financial information, then the time to do so is now. Regularly reviewing and monitoring this essential data will help to ensure your business stays on track for success.