The 9 Most Important Financial Numbers Explained

THE 9 MOST
IMPORTANT
FINANCIAL
NUMBERS
EXPLAINED

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

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

2. Net Income
Also known as net profit or net earnings, your net income is very
much related to your cash flow. This is a good indicator of how
your business is doing, as it will help determine if you need to
adjust your business, or if you are on the right path.
Your income – expenses (including taxes) = net income
Knowing this number will help you determine the financial
position of your business.

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

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

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

6. Total Inventory
For many small businesses that sesll physical goods, it’s
important to measure inventory on a weekly basis to make sure
that it isn’t increasing. If your inventory is increasing, this is
usually an indicator of sales problems.
Measure inventory on a weekly basis
Your storage costs, waste, and of course reduced profits are
connected to inventory, so it’s very important that you monitor
your 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 Ratio
This number can quickly show the financial stability of your
business. You get it from your balance sheet. For the quick
ratio:
current assets / current liabilities = quick ratio
Your ratio should be greater than 1. If your ratio is unfortunately
lower, that means that you’ll need to work to improve your
company’s profitability.

9. Your 20% customers
This is a number that has to do with the math related
specifically to your customers. Basically, sort your customers
by revenue, then take the top 20%. Those are your most
valuable customers.
The 20% highest revenue customers
Know your top 20% cater to them, and work on converting the
other 80% into top customers as well.

Read our full article by following the link below:
The 9 Most Important
Financial Numbers
Explained

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