Key Financial Metric to Check the Financial Health of your Business
Knowing the financial standing of your business is essential to keep it from crumbling down. The ability to pay your staffs’ monthly salary is not the only indicator you need to know the financial health of your business. Net income growth, current ratio, quick ratio, and return on asset are some of the key financial indicators to know where your business stands financially. An accurate financial statement helps you to plan your business strategy and predicts future performance.
- Profitability metric
The profit and loss statement, also known as the income statement, contains the net profit, the gross profit and the operating profit. The income statement measures the profitability of the business at a given period but it is usually for the period of three years. As a small business owner, you can use online accounting software to determine the profitability of your enterprise. It allows you to compare the profit made in one fiscal year with another. You must note that increase in sales does not necessarily result in increase in profit especially if there is corresponding increase in expenses.
- Liquidity metric
This is an important metric to determine how your business is fairing. The liquidity metric allows you to measure the working capital and the current ratio of your business. In other words, it deals with how much money the business has to be able to deal with current needs. In essence, liquidity metric has to do with the current asset and current liability of the business. An important current asset is the account receivable while the account payable is a current liability. The current asset must be more than the current liability for a business to be liquid.
- Leverage metric
The amount of debt a business owes determines how long the business would last. The Leverage metric gives you an insight into the financial health of your business by considering the amount used by the owner against that of the creditor to finance the business. The debt to equity ratio and the debt to asset ratio are the two most important ratios use in getting the solvency of a business. You must note that the lower the ratio, the better for the survival of your business.
- Activity metric
Activity metric is all about the management of the business. How you use the resources at your disposal would say a lot about the growth of your business. Some activity metrics include inventory turnover, fixed asset turnover, account receivable turnover, average turnover period. Although it is important to stock the inventory, too much inventory tie down capital needed for growth. Therefore, carrying out activity metric reduce the chance of excess inventory.
- Growth metric
It is essential to measure whether your business is actually growing or not. The growth of a business is determined by factors such as, increase is in profits, sales revenues, working capital, employees and customers. However, increase in all these is bound to result in increase in the running cost of the business, which is normal as long as the expenses do not exceed income.
To sum up, these metrics do not only show where your business stands but where it is likely to be in a couple of years. Therefore, it is essential to do a regular evaluation of your organization using these metrics to promote its survival. What better way to do it than to use myBooks online accounting software. https://www.zetran.com/mybooks/