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12 Vital Financial Metrics For Small Businesses

Forbes Finance Council

Startups and small businesses are particularly reliant on solid financial reports, which they use to gauge progress, guide operational decisions and set goals. But all information isn’t equally valuable, and small businesses need to know which metrics will provide the best data to build on.

Below, 12 experts from Forbes Finance Council share the financial metrics they deem the most important for small businesses to create and review to ensure long-term success.

Photos courtesy of the individual members.

1. Cash Flow

The most critical metric is cash flow—not only the report but the analysis. Every entrepreneur reckons that money equals “life” for their startup. But many forget that a lack of cash equals death. There are plenty of tools to control finance in general and cash flow in particular. Key metrics to watch are cash burn (measured monthly) and runway (how long you can operate). - Anderson Thees, Redpoint eventures

2. Profit Goals And Profit Per Customer

We tell clients, “Nothing guarantees financial success, but an essential part is to develop targets, budgets and goals as measuring sticks.” Be deliberate and define the amount of profit you want to create. Then, calculate your profit per customer. Finally, quantify the number of customers needed to reach your long-range and short-range goals. Very few businesses quantify these basic but extremely important numbers. - Paul Hood, Hood & Associates, CPAs, PC

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3. Operating Cash Cycle

According to a study by U.S. Bank, 82% of companies fail due to poor cash flow management. When an opportunity for growth presents itself, organizations need to understand their operating cash cycle—the time it takes for cash to become available after capital investment—and their maximum self-financed growth rate to paint an accurate picture of whether they can afford to take that leap. - Shawn Sweeney, Spinnaker Consulting Group

4. Profit And Loss

As a CPA, I request a business client’s profit and loss report each quarter for tax estimates. Not having this report is detrimental to the company’s internal review, bank needs and tax reporting needs. While it doesn’t track the cash flow of the business, the P&L shows your bottom line from an outsider’s perspective. Bonus: Create a reconciled balance sheet to see if you caught everything and have assets! - Jackie Meyer, Meyer Tax, The Concierge CPA Coach

5. Average Cost Of Customer Acquisition

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. - David Brim, Bright Impact

6. Fixed Burn Rate

Companies often do not make sure they can reduce their burn rate. I would even go as far as to say it’s better to pay a little extra for things versus being stuck in long-term contracts. Keep an eye on growth and success, but keep your fixed burn rate under control as you never know when you will have to cut costs. - JD Morris, Red Hook Capital

7. Regulatory Requirements For Your Industry

Startups and small businesses should never forget the regulatory requirements concerning financials. Many industries require licenses and financial obligations such as minimum capitals, quarterly submissions and financial ratio requirements. Keep track of them to avoid heavy financial penalties for noncompliance. - Frans Wiwanto, Flywire

8. Churn Rate

It’s no secret that keeping clients is more profitable than landing new ones, especially when measured in years. Churn is a measure of how “sticky” your product or service is and how long it gets used. Without knowing about and working to lower churn, it will be impossible to measure true ROI and accounting rate of return. Knowing the data and the reasons your business has the churn it does is key to long-term success. - Jordan Friedman, Zodaka

9. Budget Versus Actual

I am sure most would answer cash flow, but the reality is people don’t look at their cash flow much. It is hard for most owners or leaders to understand this report. Budget versus actual is something that will feel more tangible. Everyone likes to know they are making progress toward a goal or where they need to devote attention, so budget versus actual will get better attention. - Marjorie Adams, Fourlane

10. Projected Profit Loss Versus Actual

I believe each company should create a projected profit loss each year. This allows you to manage your budgets in each individual expense category. Small businesses should then compare the actuals spent with the projected and see if there are any red flags. This is a solid way to ensure that expectations are meeting reality and that there are no red flags. - Jonathan Moisan, Advertise Purple

11. Financial Ratios

Small-business owners should routinely assess their financial ratios, including their efficiency ratio (cost of earning a dollar of income), liquidity ratio (how much liquidity is available to cover your debts), and profitability ratios (how much your company earns relative to its sales). Together, these ratios tell a very revealing story about your business’ overall financial health. - Tyler Gallagher, Regal Assets

12. Employee Productivity

Employee value generation is critical. You know what people cost—are they generating enough value to justify these amounts? Too often, employee productivity is not monitored. Owners look at the big picture and don’t drill down to the employee level to see if people are generating a positive return. Employees tend to be the most valuable and expensive asset, so see if they’re worth it. - Chris Tierney, Moore Colson CPAs and Advisors