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Operating Cash Flow
Operating cash flow is the total cash produced from your business operations, which indicates whether your company has sufficient cash flow to operate as is or you need more funding. The operating cash flow focuses on money in, money out that are related to your primary business functions, such as inventory, services, salary, and sales.
Any investments or financial transactions that aren’t part of your operating cash flow are separate transactions, such as dividend payments and purchasing capital.
The current ratio is used to evaluate your business’s short-term liquidity. It indicates the capacity to generate enough revenue to cover your debts in a financial emergency.
The two components of the current ratio are current liabilities and current assets.
- Your current assets are any liquid assets that can be turned into cash within one business year, such as your marketable securities, inventory or accounts receivable.
- Your current liabilities are your debts and financial obligations within one business year that are recorded on a balance sheet, such as account payables and short-term debts.
Cash Flow Forecasting
Cash flow forecasting is the process of estimating your future financial position. This is measured by estimating the money you expect to flow in and out of your business, including all your projected income and expenses over weeks, months or years. This is an important metric for preparing to scale since a business that runs out of cash without obtaining new financing will become insolvent.
Return on Investment
Return on investment measures your profits or losses against your investment. ROI is typically a percentage used to compare profitability or efficiency of various investments, such as the money used for marketing and the profits gained from marketing efforts.
If your ROI is a positive percentage or other possibilities for higher ROIs are available, you can develop a strategy for maximizing your investment options to fuel growth and profitability.
Return on Equity
Return on equity is your net income that is returned as a ratio of shareholders’ equity. This ratio determines your business’s profitability by disclosing your generated profit from the shareholders’ investment. ROE is useful in determining the efficiency of your business or comparing your profitability against your competitors. It indicates how you use the money invested in your business to create profits.
Return on Assets
Return on assets is a profitability ratio that measures how much profit a company can generate from assets. This will indicate how effective your management is at generating profits from invested capital. ROA varies according to public companies and industry, but generally, a higher ROA percentage shows that you can generate a higher profit with fewer investments.
Gross Profit Margin
Gross profit margin indicates your business’s financial status and business model by determining the amount of money remaining in sales after deducting the costs of goods sold. Your gross profit margin should indicate stability.
If the gross profit margin shifts because of industry changes or pricing strategy, it can be adjusted. For example, you can sell a high-end product at premium prices if competitors are selling a basic product at an average price and still maintain a high gross profit margin.
Net Profit Margin
Net profit margin is the ratio of net income or profit that’s generated as a percentage of revenue. It indicates how much of the revenue you earn is actual profit. Net profit margins can vary by business size and industry, but the appropriate net profit margin shows that your business is strong. If you monitor how your net profit margin increases or decreases, you can determine if your business is prepared to scale and predict profits.
Sales growth is a metric that indicates the ability of the sales team to increase revenue over a fixed period. This is a crucial KPI to determine financial projections for growth and business decisions.
Ideally, sales growth should be monitored weekly or monthly to determine consistent growth or identify any issues with your teams or processes. It’s important to address these issues before scaling to prevent any negative trends.
Preparing to Scale
These KPIs give you insight into how your business is performing as is and whether your business is ready to scale. While some KPIs may provide you with more information than others, they all contribute to the whole picture and should be interpreted on a whole.
Begin monitoring your KPIs and assessing any strengths and weaknesses you find, develop a strategy to address them, and you’ll be ready to scale your business.