Cash Flow

The single most important metric for a small business owner is cash flow.  Since cash is usually very tight for every small business, being able to monitor and direct where your cash is going (operations, investments, financing) is ultra important.

Year Over Year (YoY) Revenue Growth Rate

Revenue growth YoY is an important metric to determine the rate at which the business is growing. Most early stage businesses will have growth rates shaped like a hockey stick. Over time, revenue growth will slow down, but it should be an issue of concern if the growth rate does not increase or significantly slows down YoY.

Gross Profit Margin (GPM)

GPM gives you an idea if the business’s core product or overall business strategy is profitable. If the costs of manufacturing / producing and selling the product exceed the amount of revenues generated from the sale of the product, then the overall business strategy should be reconsidered.

Accounts Receivable Turnover

This KPI shows how quickly the business is able to collect cash from customers. In an ideal world, you want this metric to be as high as possible. A higher number indicates a faster turnaround time. Since cash is usually very tight for  a small business, it is important that your customers are paying on time.

It helps to ascertain beforehand the creditworthiness of potential customers by performing credit and background checks; there are a few cloud-based services that help small business perform these kind of checks.

Equity

In general, for a growing business, the equity of the business should be close to -0-.

This indicates that the owners of the business are funneling profits (if any) back into the business instead of taking it out of the business for themselves. For the business to grow rapidly, it is important that profits be redirected to capital expenditures, hiring new employees and expanding into new product lines.

Contributed By:
Jigar Patel, CPA
Account Manager