8 Key Financial Metrics for Small Businesses to Know

small business finance metrics

Starting a small business is hard—and tracking its progress can sometimes feel even harder.

You want to accept payments from customers, report everything correctly, and accurately track all your financial metrics in order to manage your growth while preventing waste.

But with so many finance and accounting terms being thrown around (rates of return, earnings per share, efficiency ratios,… the list goes on), it’s easy to feel like you’re losing the forest for the trees.

If that’s the case, you’ve come to the right place. Below, we cover eight key financial metrics every small business needs to understand and track.

Net Income

A business can earn millions in gross recurring revenue, but if its expenses are the higher number, that business is still far from profitable.

Keep in mind that, while the terms may often seem interchangeable, net income is not the same as revenue. 

Here’s the difference in a nutshell:

  • Revenue (or sales)is the total sum of money generated from doing business
  • Net income is the money left over after tax and other business expenses

Say you run a restaurant. Here’s what your income statement might look like for a given month:

restaurant expenses

Source: Bookkeeping Chef

Your total gross sales for the month were $209,605—which sounds impressive. But it wouldn’t be smart to use that number when thinking about how much income you really made, would it?

No, first you need to see if you broke even with your expenses—and how much profit you have leftover to show for it.

As you can see, there are quite a few expenses involved in running a restaurant, and each of these is deducted from your gross revenue to get your net income.

Things like the cost of goods sold, advertising, rent, and taxes need to be accounted for before you see how much you have leftover to use.

By the time you cover the costs of doing business, you have $16,795 left in net income. This is the true income for your business, and this number tells you how profitable you truly are.

Profit Margin Ratio

When tracking your profit, it’s important to understand the difference between gross margin and net margin. While both terms refer to profitability ratios, they are very different.

Gross margin is the percentage of money left over after deducting the cost of goods sold (COGS) from the total revenue.

gross profit margin

Source: Regpack

In our example above, gross profit is calculated by taking the total revenue ($209,605) and subtracting the COGS ($104,802) to get $104,803.

This number, expressed in a percentage of the total revenue, is the gross profit margin. In this case, it is 50%.

But you can see from the income statement above that the calculations are far from over once you get the gross profit margin. There are still quite a few costs to account for, including other operating expenses, interest, and taxes.

If net income is calculated by first subtracting all expenses from the total sales, the net profit margin is the percentage of net income compared to the total sales.

net income vs net profit margin

Source: Regpack

Both of these are important to track because they show you how well your company is really performing.

Expenses

They may say that you have to spend money to make money—but how much is too much?

Let’s take a closer look at what you should expect (and aim for) when calculating the cost of goods sold for your business.

The best way to think about your expenses is to measure them as a percentage of revenue. The optimal average expense percentage varies by industry, service or product type, and even the individual business in question.

Speaking extremely generally, it may be optimal for your business to keep costs and taxes within 80-95% of your gross revenue. But benchmarks vary widely by industry and other factors.

Industry averages for each sector below indicate the average benchmarks for net profit margin and gross profit margin.

As a quick reminder of definitions:

  • Gross profit margin is revenue minus the cost of goods sold
  • Net profit margin refers to revenue minus ALL expenses, including COGS, operating expenses, interest, and taxes

As you can see in the chart below, if you run a restaurant, your benchmark for pre-tax profit is 67%. So, you should aim to spend 33% or less of your revenue on the cost of goods sold.

restaurant pretax profit

Source: Camino Financial

If your expenses make up a higher percentage of revenue, it may be time to adjust your operations and expenditures.

Cash Flow

As the name implies, cash flow is the movement of money both in and out of a company. Money that comes in is known as an “inflow”, while the money that’s spent is called an “outflow.”

Ben Richmond, a chartered accountant and U.S. money manager at Xero, explains cash flow as the fuel that keeps the company running:

“If you’ve got no gas, the Ferrari is nothing but an ornament sitting in the garage.”

In financial statements, a cash flow statement like the one below reports the company’s sources of cash and how it was used over the time period.

cash flow statement

Source: Investopedia

There are three types of cash flow, based on the money’s source:

  • Operating cash flow
  • Cash flow from investing
  • Cash flow from financing

Let’s take a closer look at each type below.

Operating Cash Flow

Operating cash flow (OCF) is the cash flow from operating activities. It’s usually the first section on a cash flow statement.

Whether your company sells a product or provides a service, your OCF is the cash that flows in and out from doing everyday business activities like:

  • Selling products and/or services
  • Buying inventory and paying suppliers
  • Writing paychecks
  • Paying taxes
  • Making rent and utility payments

Essentially, OCF is the amount of income received from the business doing what it’s supposed to do.

Cash Flow From Investing Activities

Cash flow from investing activities (CFI) is the cash flowing in and out due to investment, like:

  • Knowing how to invest in stocks and bonds
  • Buying long-term assets
  • Selling assets or securities
  • Capital expenditures

The CFI metric is used to analyze whether the company is set up for long-term growth. Even if a business is generating negative investing cash flow by purchasing assets, these investments could lead to greater cash flow in the long term.

Looking at the company’s investment activities as a whole can help analysts and investors understand the company’s financial health and long-term goals.

Cash Flow from Financing

The last type of cash flow is the money generated or spent on financing activities. These activities might include:

  • Generating cash through bond offerings
  • Paying dividends to shareholders
  • Stock buybacks
  • Paying down debt
  • Taking on loans from a bank or creditor

Cash flow from financing (CFF) measures the movement of cash between the company’s investors, creditors, and owners. It deals with the debt and equity of the company, as well as the dividends paid to investors.

Companies need to raise cash in order to grow, or at the very least stay afloat. Whether it’s through issuing bonds, selling stock, or taking on loans, these activities can be seen in the CFF section of the cash flow statement.

Accounts Receivable/Payable 

In a perfect world, customers would always pay promptly and in full. But as every small business owner knows, we don’t live in that perfect world.

In the course of doing business in any industry, companies must have a process for tracking due and overdue payments from customers. They must similarly track the payments they need to make to vendors, suppliers, and any other party they owe money to.

Accounting practices typically categorize these payments in various stages of “aging.”

An accounts aging report organizes customers’ outstanding balances in order of how long the invoices have been overdue. Most accounting and payments software options, such as Regpack, generate reports that let you track overdue payments from customers.

regpack users balance due

Source: Regpack

Income in theory is one thing, but until those funds have landed in your bank account, you haven’t really made any money—which is why accounts receivable is an important metric for businesses to track.

You have to know which invoices are still outstanding if you want to follow up on late payments, charge late fees, and hunt down every cent you’re owed.

And similarly, it’s crucial to track your accounts payable (the funds you owe to others).

 patriot accounts payable report

Source: Patriot

An accounts payable (A/P) aging report shows you the invoices that are upcoming, due, and overdue so that you can manage your cash flows and not be caught unawares by a late fee.

Quick Ratio

A quick ratio is a very useful metric that investors use to determine a company’s financial strength.

Essentially, the quick ratio answers the question of how quickly the company could pay off its debts. If the business’s quick assets (or assets that could easily be converted into cash) are far outweighed by the company’s debts, it may not be a wise investment.

The quick ratio is a lot like its name suggests: a quick calculation. It may not be very nuanced, but it’s an easy way to get a broad idea of the financial health of a company.

To determine a company’s quick ratio, simply divide the sum of its highly liquid assets by the sum of the company’s current liabilities.

quick ratio

Source: Regpack 

Quick assets are anything that might be converted into cash within 90 days, such as:

  • Cash and cash equivalents
  • Securities that can be sold quickly
  • Current accounts receivable
  • Any other assets or inventory that can be sold (at their actual value) within 90 days

Notice that you don’t have to include all liabilities in the quick ratio equation—only current ones. Current liabilities are only debts that must be paid within a year, such as:

  • Dividends
  • Salaries and wages
  • Short-term loans
  • Accounts payable
  • Current payments of long-term loans
  • Income taxes
  • Payroll taxes

So, what makes a good quick ratio? If the ratio is at 1 or more, it has enough liquid assets to pay its current liabilities—which is a positive indicator of the company’s current financial health.

Average Customer Acquisition Cost

Customer acquisition cost (CAC) is the measurement of how much it costs (in terms of sales and marketing) to earn a new customer over a specified window of time.

Customer acquisition cost is calculated by dividing total sales and marketing cost by the number of new customers acquired over that time period.

customer acquisition cost

Source: Regpack

As you can imagine, the average customer acquisition cost varies greatly by industry. For example, the average cost to gain a new lead in the B2B financial services industry is around $160—while the cost in the B2B retail industry is just $34.

The average CAC metric is very useful to businesses in determining how much money is needed to expand their customer base without sacrificing profit. Once you know your average customer acquisition cost, you can set goals to decrease that cost over time.

As David Brim of Bright Impact explains:

“Acquiring profitable customers is an essential part of any business. Business owners should regularly work to understand the average cost of acquiring a certain type of customer relative to the lifetime value of that customer. Then work to reduce customer acquisition costs by improving marketing while determining ways to retain or upsell existing customers to increase customer value.”

After all, the less it costs you to earn new business, the wider your profit margin.

Churn Rate

Finally, it’s crucial for businesses to track their churn rate, or the rate at which they lose customers.

You can’t fix what you don’t know is broken, right?

User churn is the number of customers who stop using your product or buying your service, and generally end their business relationship with your brand.

While it may seem like the solution is to simply acquire new customers, remember from the previous section that it costs money to find new buyers.

customer procedure comic

Source: Huify

It’s much more profitable to keep existing customers happy than to continually replace them with new ones.

As Sophia Bernazzani writes for HubSpot:

“While there’s a certain allure that comes with capturing new customers, keeping customers coming back will continually result in a greater ROI—and it costs 5-25X less.”

A high churn rate negatively affects the other metrics on this list, and it makes sense why; without a strong and happy customer base, it can be difficult to see consistent growth and profits from quarter to quarter.

So how do you know when your churn rate is too high?

First, calculate your churn rate by dividing the number of customers who have churned by the total number of customers you have for a specific period of time.

Do this calculation on a regular basis, and you’ll have your company’s average churn rate that you can compare to the average rates in your industry.

average churn rate

Source: Recurly

If your churn rate is higher than the industry average, it’s time to start focusing on retention. You can find some useful tips on how to convince your customers to keep doing business with you here.

These Small Business Finance Metrics Can Make a Difference

The complex nature of spending money to make money, including taking on loans, offering discounts, chasing down overdue invoices, and keeping the office lights on, can make it extremely difficult to figure out whether you’re even breaking even.

That’s why tracking these eight metrics can help shed some light on your business’s financial health.

Make sure you’re using accounting and payment processing tools that provide the detailed data you need to monitor your key finance metrics.

Regpack’s advanced analytics features give you in-depth reports on payments, overdue invoices, sales, customer data, and more. Take charge of your company’s financial health with a free demo of Regpack today.

About The Author
Asaf Darash
CEO and Founder of Regpack

Asaf, Founder and CEO of Regpack, has extensive experience as an entrepreneur and investor. Asaf has built 3 successful companies to date, all with an exit plan or that have stayed in profitability and are still functional. Asaf specializes in product development for the web, team building and in bringing a company from concept to an actualized unit that is profitable.

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