Starting a business is becoming more and more popular, especially among younger people. Not only do you get to work for yourself, but you can essentially start any sort of company you want. However, starting a business isn’t easy, as if it was, everyone would be doing it. Lots of thought, preparation and hard work goes into owning a business.
Even once the business is up and running, your hard work is not done. You need to be sure to monitor your metrics and performance analytics throughout your lifecycle to ensure everything is as expected. With that in mind, this blog post is going to look at three of the most important financial metrics that you should be sure to know.
Debt to Equity Ratio
The debt to equity ratio of a company is a measure that indicates how much debt a company is using to finance their assets, and relates it to the shareholders equity. The higher your debt to equity ratio, the more debt that you have taken on to grow the company as opposed to bootstrapping it and using investor money.
A higher debt to income ratio isn’t always bad, but is definitely more risky to lenders than a lower debt to income ratio. A lower ratio means you have been trying to grow without taking on more debt, and are generally more financially stable. All in all, this measure lets you know how good you have been at using shareholder investments and how profitable a business is.
Free and Operating Cash Flow
Of course, the main goal of a business is to make money, so knowing how much cash flow you have is incredibly important to track. Operating cash flow is all about making sure you have enough money for your business to operate, and to continue to operate in the future. If you don’t have enough operating cash flow, your business could stagnate or even die.
Free cash flow is the cash that a business has left over after operation expenses, upgrades and other costs. If you have a lot of free cash flow, it is a good indication that your company can grow, reduce debt and expand in other ways. It is a sign of a successful business and is easily discovered by looking at your sales and then subtracting your costs and expenses.
Return on Assets
Return on assets is a metric/performance indicator that sees how well a company is at using their assets to make money. See, everything that your company owns should in some way contribute to the growth of your business. This asset just indicates how profitable your company is when compared to others. It is often displayed as a percentage and is simply found out by dividing your total assets from your net income.
It can also be seen as “return on investment” and basically lets you know if the assets that you have purchased for your company have been worth it up until this point. This is one of the best and most accurate ways to compare companies in a similar industry, but the numbers themselves will be very different from industry to industry. However, generally, an ROA of over 5% is considered good.
These are just a few of the many different financial metrics and performance indicators that you can use to measure how successful your business has been over its lifetime. Knowing your numbers is incredibly important as without it, running a successful business will be difficult. Many of these metrics are incredibly simple to figure out, so there is no reason not to try them out.