Question and Answer

Q: What financial metrics should a small business owners need to regularly monitor to track business’s performance against the budget?

Monitoring key financial metrics is essential for small business owners to track their performance against the budget and make informed decisions. Here are some important financial metrics that small business owners should regularly monitor:

  1. Revenue: Keep track of your total sales or revenue. Compare this with your budgeted revenue to see if you’re meeting your sales targets.
  2. Expenses: Monitor both fixed and variable expenses. Compare actual expenses with budgeted expenses to identify any discrepancies and control costs.
  3. Gross Profit Margin: Calculate the gross profit margin to understand how efficiently your business is producing goods or services. Gross profit margin is the percentage of revenue that exceeds the cost of goods sold (COGS).

Gross Profit Margin = (Revenue−COGS Revenue) × 100Gross Profit Margin = (Revenue Revenue−COGS​) × 100

  1. Net Profit Margin: This metric reflects the percentage of profit the business has earned from total revenue after all expenses. It provides a comprehensive view of your overall profitability.

Net Profit Margin = (Net Profit Revenue) ×100Net Profit Margin = (RevenueNet Profit​) ×100

  1. Cash Flow: Regularly monitor your cash flow to ensure you have enough cash to cover operational expenses. Cash flow statements show the inflow and outflow of cash over a specific period.
  2. Accounts Receivable Aging: Track the aging of your accounts receivable to ensure customers are paying on time. Aging reports categorize receivables by the length of time they have been outstanding.
  3. Accounts Payable Aging: Similarly, track the aging of your accounts payable to manage your outstanding bills and maintain good relationships with suppliers.
  4. Return on Investment (ROI): Calculate the ROI for specific marketing campaigns or investments to assess their effectiveness and make data-driven decisions for future investments.

ROI = (Net Profit from InvestmentCost of Investment) ×100ROI = (Cost of InvestmentNet Profit from Investment​) ×100

  1. Break-even Point: Determine the level of sales at which your total revenue equals your total costs. This helps you understand how much you need to sell to cover all your expenses.
  2. Customer Acquisition Cost (CAC): Calculate how much it costs to acquire a new customer. Divide your marketing and sales costs by the number of new customers acquired during a specific period. CAC = Marketing and Sales CostsNumber of New CustomersCAC = Number of New CustomersMarketing and Sales Costs​
  1. Customer Lifetime Value (CLV): Determine the total revenue a business can expect from a customer throughout their entire relationship with the company. This helps in assessing the long-term value of customers.
  2. Inventory Turnover: If your business involves selling products, monitor how quickly you are selling your inventory. Higher turnover indicates efficient sales and reduces the carrying costs of inventory.

Inventory Turnover = Cost of Goods Sold (COGS)Average InventoryInventory Turnover = Average InventoryCost of Goods Sold (COGS)​

Regularly reviewing these metrics against your budgeted figures provides insights into your business’s financial health, allowing you to make strategic decisions and adjust your operations as needed.