Top Four Important Financial Metrics To Help Any Business Grow
“The only true measure of success is the ratio between what we might have done and what we might have been on the one hand, and the things we have made and the things we have made of ourselves on the other.”
H.G. Wells
This quote is no doubt written in a general context, but its application to the corporate world is still the same. The main goal of a business is to grow, increase profitability, and sustain for the long term, but it’s easier said than done! A business has to go through a lot to grow. It requires methodologies and models to gauge where it stands, where it was, and where it wants to be. That’s when an important financial matrix plays a crucial role.
Financial Matrix:
A financial matrix is a financial ratio that helps a business calculate various factors important for its progress and for being able to work as a going concern. Financial ratios fall into different categories; some are applied for knowing historical performances, whereas others are for forecasting. Based on the requirements of a business, the most important financial matrix is used.
Without using these metrics, a business can also fail in the ignorance of knowing the existing state of the business. Financial metrics are derived from the financial statements of a business: the balance sheet, income statement, and cash flow statement.
Though different financial metrics have their own findings and usage importance, we have a list of the four most important financial metrics for your business to grow!
Let us give you a smooth ride over understanding these key metrics.
1). Cash Flow to Revenue Matrix
Through this matrix, a business can measure how effective its internal cost control is.
Cash flow to revenue = operating cash flow/revenue in%
Whereas, Operating cash flow = operating income + Depreciation minus Taxes + Change in Working Capital
The higher the ratio, the better it is for a business, as it reflects the possibility of higher convergence of income into net profit.
2). Breakeven Point
breakeven point simply means how a business can meet its daily needs by selling enough units of products or services. When a business sells more than the breakeven point, it runs profitably, whereas if it sells below the breakeven point, it only increases costs, and its possibility of being solvent in the long run becomes vague.
In layman’s words, when revenues exceed costs, a business is said to be above the breakeven point. In terms of formula, it’s narrated as follows:
Breakeven point= = fixed costs / (Selling Price of unit minus variable costs)
This important financial matrix helps a business by providing a view of how many units it would have to sell to be in the market profitably.
3). Runway Matrix
There are times when selling can get a hook, especially when a business has just started. It takes time for a business to kick in revenues and run on profitability. Here, the runway ratio comes in handy, as it helps a business by giving a particular number of days till it can run without stable revenue generation.
Runway Rate= Cash Balance/Burn Rate
Whereas Burn rate = cash balance in the prior month- minus cash balance in the current month
It simply means the monthly rate at which a business uses up its money (like paying salaries, bills, etc.)
4). Net Profit Margin
In layman’s terms, this matrix describes the net profit ratio to revenues. It considers all the important aspects of a business, like COGS (Cost of Goods Sold), taxes, interest, etc. and thus becomes very essential to be calculated for a business to grow.
Net Profit Margin: Net Income* 100 / Revenue
Whereas Net income= = revenue minus COGSOther expenses, other expenses, interest, and tax
We, at Meru Accounting, know how much effort it takes for a business to grow, and thus we are here to help you calculate these financial metrics along with other financial indicators for your convenience and progress. Why worry when we are here, contact us now!
