5 Essential Financial Metrics Every Business Owner Should Track
Dec 10, 2024
Running a successful business means keeping an eye on your finances. But with so many numbers to track, where do you start? Here are five key financial metrics that are easy to understand and can help you make better decisions for your business.
1. Gross Profit Margin: How Much You Really Make
Gross profit margin shows how much money you keep after covering the cost of producing your product or service. Here’s how to calculate it:
Gross Profit Margin = (What You Earn - What It Costs to Make) ÷ What You Earn x 100
For example, if you earn $100 from a sale but it costs $60 to make the product, your gross profit margin is 40%. A higher percentage means your business is running efficiently and leaving more room for profit.
2. Customer Acquisition Cost (CAC): What It Costs to Get a New Customer
This number tells you how much you’re spending on marketing and sales to bring in a new customer. To find it:
CAC = Total Spent on Marketing ÷ Number of New Customers
For instance, if you spend $1,000 on ads and get 10 new customers, your CAC is $100 per customer. The goal is to keep this number low while still attracting quality customers.
3. Cash Runway: How Long Your Money Will Last
Your cash runway shows how many months your business can keep running with the money you have right now. It’s simple to figure out:
Cash Runway = Cash You Have ÷ Money You Spend Each Month
If you have $50,000 in the bank and spend $10,000 a month, you’ve got 5 months of runway. This number helps you plan ahead, so you’re not caught off guard when funds run low.
4. Operating Expenses Ratio: Are You Spending Too Much?
This ratio compares your regular operating costs to how much you’re earning. Here’s the formula:
Operating Expenses Ratio = What You Spend to Run the Business ÷ What You Earn x 100
If your business makes $10,000 in a month and you spend $2,500 on rent, salaries, and other expenses, your ratio is 25%. The lower this number, the better you’re managing your costs.
5. Net Profit Margin: What You Take Home
Net profit margin is the percentage of money you actually keep after paying all your expenses. It’s calculated like this:
Net Profit Margin = (What You Keep After All Costs ÷ What You Earn) x 100
For example, if your revenue is $20,000 and you end up with $5,000 after expenses, your net profit margin is 25%. This tells you how much profit your business makes from every dollar earned.
How These Numbers Help Your Business
Understanding these numbers isn’t just about doing the math—it’s about making better choices. Here’s how:
- Set Goals: Decide where to improve, like lowering expenses or increasing profits.
- Plan Ahead: Know how long your cash will last and when to adjust your budget.
- Grow Smarter: Use these numbers to decide when and how to expand your business.
When you track these five financial metrics, you can stay in control and make decisions with confidence. Start today, and watch your business thrive!
If you've found value in these insights, I invite you to dive deeper into the world of business growth by subscribing to the Candy Valentino Show on Apple Podcast.
You can also explore further business training opportunities at foundersorganization.com to see our upcoming events and services.
