The 10 Most Important Metrics to Track in your Business’ Accounting Report

Financial reporting is one of the most important components of running a business. Without accurate financial reports, it will be impossible to objectively determine if your business is moving in a productive direction. Even if your business has a relatively simple structure, it will still be crucial to pay attention to your key financial indicators on a regular basis.

Your business’ most important financial reports will likely be your income statement, your balance sheet, and your statement of cash flows. Each of these reports reveals intimate details about the health of your business. When combined, it becomes possible for outside investors and other relevant parties to gain a fuller understanding of your business.

According to arecent survey by The Sleeter Group, about 72 percent of small business owners have changed their CPA, due to their inability to give proactive advice. While the problem may largely rest with the CPAs themselves, it is also possible that many of these businesses are simply not reading their books in a proactive way. In other words, they are failing to pay attention to the most important details.

In this article, we will discuss ten of the most valuable accounting metrics for your business to pay attention to. We will also discuss the potential impact that each of these metrics may have on the well-being of your business. By taking the financial pulse of your business on a regular basis, you will have a much easier time achieving your long-term financial objectives.

1. Current Ratio

The current ratio is one of the most effective ways for your business to evaluate its liquidity. The current ratio is calculated by dividing current assets/ current liabilities, which can both be gathered directly from your balance sheet. When your current ratio is higher, your business will have more financial flexibility. This means that if a financial emergency or a new opportunity were to emerge, your business will have a much easier time making adjustments. Both increasing assets and reducing liabilities will effectively raise the ratio.

1. Accounts Payable Turnover

The accounts payable turnover is another useful liquidity ratio, which is calculated by dividing total supplier purchases/ average accounts payable. Essentially, this ratio is used to indicate the number of times per period that your business pays its average accounts payable amount. When the ratio decreases, this suggests your company is having a more difficult time (or is choosing not to) paying your suppliers.

1. Accounts Receivable Turnover

The accounts receivable turnover is similar to your accounts payable turnover, only it is measuring cash flows in the opposite direction. To calculate the accounts receivable turnover, divide net credit sales/ average accounts receivable. When this ratio is higher, it indicates that you are able to quickly collect from your customers, enabling your business to quickly take advantage of the money that it’s earned. While increasing credit interest may improve this ratio, it also may upset some of your most important customers.

1. Total Asset Turnover

In order to calculate total asset turnover, simply divide your sales/ total assets. This is one of the most useful efficiency ratios because it shows how well your business is able to actually use its assets. For outside investors, the ratio is also useful when determining whether your business has reached the maturity phase of the business cycle. In order to know whether your total asset turnover is good or not, compare your business to others within your industry.

1. Inventory Turnover

Inventory turnover is yet another useful turnover ratio, allowing you to determine whether your business is employing efficient inventory practices. To calculate inventory turnover, divide the cost of goods sold (COGS)/ average inventory. This figure reveals the number of times your business sells its inventory stock within a given timeframe. If your inventory ratio is above the industry benchmark, you may want to consider increasing the amount of inventory you’re purchasing at once—this may effectively reduce the cost of doing business.

1. Net Profit Margin

Your net profit margin is one of the most important indicators of whether your business is financially healthy. This margin—whose formula is (Total Revenue- Total Expenses)/ Total Revenue—accounts for all revenues and expenses and is directly tied to your bottom line. When all else is equal, having a higher profit margin will be better than having a lower profit margin. If your profit margin is negative, which will happen when total expenses exceed total revenues, then your business will likely need to make some changes.

1. EBITDA

EBITDA is among accountants’ favorite mechanisms for measuring profitability. Essentially, this figure represents your net income, minus a few select expenses. To calculate EBITDA, subtract your total expenses—excluding interest, taxes, depreciation, and amortization—from your total revenues. The theory behind EBITDA is that, because it excludes select expenses that are difficult to control, it is much more useful for essential decision-makers.

1. Return on Equity

Your return on equity indicates whether your business is making the most of the wealth has accumulated over time. If you are a wealthy company that is unable to add to its wealth, then your business is little more than a glorified savings account. Return on equity is calculated by dividing net income/ shareholder’s equity.

1. Marginal Tax Rate

Looking at your marginal tax rate will make it easier to determine how much your next sale will actually generate for the company’s bottom line. Fluctuating tax rates are a variable that many financial forecasts fail to consider. When calculating your marginal tax rate, be sure to account for tax credits, tax deductibles, and other essential modifiers.

1. Debt to Equity Ratio

Looking at the debt to equity ratio makes it possible to know whether your business is primarily fueled by creditors (debt) or shareholders (equity). The ratio is calculated by dividing total liabilities/ shareholder’s equity. High debt to equity ratios indicate that your business is financially riskier, while lower ratios indicate a more conservative financing structure.

Conclusion

When using any of these useful accounting metrics, remember to compare your business to the benchmark standard in your industry. Though accounting metrics will not always indicate what the best decisions for your business are, they certainly make it easier to know where, exactly, your business stands. If you don’t have a proper reporting method in place, you might want to consider finding an outsourced financial reporting service.