More than 28% of businesses fail because of poor financial management that includes keeping poor financial records. Therefore, it is essential for every business owner not only to understand the key financial metrics, but also to understand what they can tell you and how to monitor them on an ongoing basis.
There are a number of metrics that every business owner should know and these include:
Net Profit; and
Cash Burn rate.
Accounts Payable is the total of bills that you have to pay, but not paid as yet. This is a business short – term debt that must be paid. It is important to track this metric so as to manage cash flow.
Accounts receivable is money that is owed to a business by their customers for products/services sold or rendered to them. Encouraging customers to pay invoices faster will decrease your chance of getting into a “cash crunch”.
Directs costs – also known as (c.o.g.s) cost of goods sold – are the costs attributed to the productions of a specific product or service. Direct costs are subtracted from revenue/income to calculate the gross margin of a business.
Cash Flow measures the money – the actual money moving in and out of your bank account. The most important thing to know about cash flow is that it isn’t “profit”.
This shows how good a business is at generating income from normal operations of the business.
This is operating income minus taxes and interest. It is the bottom line of your business and the net profit left over after all expenses paid.
Cash Burn Rate
The cash burn rate is the rate at which a business uses up its cash reserves or cash balance. This metric will show how you’re maintaining a healthy balance from a positive cash flow.
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