The 9 Most Important Financial Numbers Explained

THE 9 MOSTIMPORTANT FINANCIAL NUMBERSEXPLAINED



IntroductionSmall business owners are known to carry a lot of weighton their shoulders. This goes without saying.However, because they take so much upon themselves,they lack the time to really learn about the most importantparts of their business. This includes finances.Finances cannot be overlooked for any business, especiallythe small ones or freelancers. That’s why today we’ll look atthe most important financial numbers every business needsto know.

1. Cash FlowOperating cash flow is the most important part of your businessand should have all your focus. To calculate this importantnumber: Cash inflow – cash outflow = cash flowIf it’s positive, and you have more inflow (money from goodsand services) than outflow (bills, loan payments, taxes, etc.),your business is doing fine.

2. Net IncomeAlso known as net profit or net earnings, your net income is verymuch related to your cash flow. This is a good indicator of howyour business is doing, as it will help determine if you need toadjust your business, or if you are on the right path. Your income – expenses (including taxes) = net incomeKnowing this number will help you determine the financialposition of your business.

3. Profit and LossYour Profit & Loss (P&L or income) statement is crucial, as itgives you a snapshot of the financial status of your business. Inorder to calculate Profit & Loss: company revenue – company expenses = profit or lossIf this numbers comes out to be positive, that means yourbusiness has made a profit. If negative, however, your businesshas made a loss.

4. Cost of RevenueThe Cost of Revenue helps you to determine what you shouldcharge on an hourly rate based on what it actually costs you toproduce a product or service. To calculate it: Raw Materials + Direct Labor + Shipping/Transportation Costs + Sales Commission = Cost of RevenueIn order to make a profit, your charges should be higher thanyour cost of revenue. If it is equal or less than CoR, you shouldbe charging more.

5. Gross MarginAlso known as the gross profit, this is related to your costof revenue. It measures how much money is left over afteryou’ve subtracted the cost of your merchandise or services. Tocalculate it: Sales price – Cost to produce good/service = Gross MarginIf you are in a competitive market, your margin will be quite low,but if you have a propreity goods or high quality services, yourmargin can be high.

6. Total InventoryFor many small businesses that sesll physical goods, it’simportant to measure inventory on a weekly basis to make surethat it isn’t increasing. If your inventory is increasing, this isusually an indicator of sales problems. Measure inventory on a weekly basisYour storage costs, waste, and of course reduced profits areconnected to inventory, so it’s very important that you monitoryour inventory number.

7. Days Sales Outstanding This is the average number of days it takes for your clients to pay your invoices. A small number is good, as it usually means more cash flow. A larger number means you need to chase your late payers. To calculate it: payment terms * 133% > Days sales outstanding If your DSO is high, you should follow one of our many tips on how to decrease payment time on invoices.

8. The Quick RatioThis number can quickly show the financial stability of yourbusiness. You get it from your balance sheet. For the quickratio: current assets / current liabilities = quick ratioYour ratio should be greater than 1. If your ratio is unfortunatelylower, that means that you’ll need to work to improve yourcompany’s profitability.

9. Your 20% customersThis is a number that has to do with the math relatedspecifically to your customers. Basically, sort your customersby revenue, then take the top 20%. Those are your mostvaluable customers. The 20% highest revenue customersKnow your top 20% cater to them, and work on converting theother 80% into top customers as well.

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