When managing the health of a business, an SME manager may be up against it. Knowledge of such key financial metrics will go a long way in aiding businesspeople to make informed decisions that ensure their enterprises remain in operation, and successful, and ensure growth. In this blog, we shall now look at the ten financial metrics that SMEs should track. Leading this way would allow you to steer your business the right way. Effective SME accounting practices are crucial for accurately tracking these metrics and supporting sound business decisions.

1. Revenue Growth

Revenue growth—monitoring it—is the very crux of being able to tell if your business is growing or contracting. It allows insight into the way that your sales have performed over time and projects the general direction in which your business moves.

• Why it matters: Revenue growth is all about the aspect of market demand, customer retention, and overall business health. Meaning, that keeping a business without good revenues is a hard act.
• How to track: Comparing revenue figures from one period to another—monthly, quarterly, or yearly—brings forth an identified trend.

2. Gross Profit Margin

A gross profit margin is a percentage of revenues left after the subtraction of the cost of goods sold. The metric shows the effectiveness of producing and selling products or services in a business.

• Why it matters: A higher gross profit margin translates into more money that a business gets to keep to cover other costs. It also indicates strong pricing strategies and cost controls.
• How to track: The calculation is quite simple: (Revenue – COGS) / Revenue × 100. Compare the margin regularly over time.

3. Operating Profit Margin

Operating profit margin indicates the percentage of revenue at the top line that a company is left with after deducting all variable expenses from the sales and all other operating costs except tax and interest payments. Furthermore, this measure provides a better perspective on the ability of a business to generate profits from operations only. It measures operational effectiveness—whether or not what you are doing in your day-to-day activity is profitable.

• How to track it: To compute, subtract operating expenses from revenue then, divide the difference by revenue, and multiply this number by 100. Aim for consistency with this metric.

4. Net Profit Margin

Net profit margin is the percentage of revenue a company has left over after all expenses, taxes, and interests have been deducted. It is considered one of the most critical metrics of how a company is doing.

• Why it matters: Shows your company’s ability to manage and monitor expenses in line with revenue. High net profit margins may signal a more sustainable business.
• How to track: Divide your net profit by total revenue, and then multiply by 100. Compare to industry benchmarks.

5. Cash Flow

Cash flow is the net amount of cash and cash equivalents that are moving in and out of business. It can either be positive (more money entering than leaving) or negative (more money leaving than entering).

• Why it is important: Cash flow is important as it ensures that your business has adequate liquidity to cover expenses that are short-term in nature; such items may include payroll, bills, and other operational costs.
• How to measure: Record the cash flow from the cash flow statement on a routine basis, and record the cash flow to operations, investment, and financing.

6. Accounts Receivable Turnover

This will show if the business has been fast or slow in receiving the money of the customers once the goods or services are sold. High rather than low is desired which shows the ease in the collection period.

• Why it is necessary: A business wants an account receivable turnover ratio that keeps cash swiftly moving in and out of the business to ensure smooth business and no worries about cash flow.
• How to track it: To compute, and divide net credit sales by average accounts receivable in a period.

7. Accounts Payable Turnover

The accounts payable turnover shows how fast your business pays its suppliers or creditors. This metric indicates how effectively you manage short-term debt and maintain supplier relationships. Additionally, in SME accounting, monitoring this turnover helps ensure efficient cash flow and financial health.

• Why it matters: Besides averting possible supply chain troubles, it pays to manage your accounts payable efficiently because it builds rapport with your vendors.
• How to track it: Divide total purchases from suppliers by the average accounts payable during the period.

8. Current Ratio

This number is the relationship between a company’s ability to pay off its short-term liabilities with its short-term assets. If the ratio gives a number that is above 1, that will mean the company can cover all its short-term obligations.

• Why it matters: The current ratio provides a snapshot of your company’s ability to meet short-term liabilities with short-term assets. It helps assess liquidity and financial stability, ensuring your business can cover its immediate obligations. A ratio below 1 may indicate potential liquidity issues.
• How to track it: Calculate the current ratio by dividing current assets by current liabilities. This metric should ideally be above 1, indicating that your business has sufficient assets to cover short-term debts. Moreover, regularly monitor this ratio to maintain financial stability and avoid liquidity problems.

9. Debt-to-Equity Ratio

This ratio compares companies’ total debt to total equity. Relatively high debt-to-equity ratios suggest that a company may be over-leveraged and thus would be considered riskier economically.

• Why it matters: It shows what proportion of business is financed by debt vs equity. High ratios might indicate problems in the future obtaining loans or investments.
• How to track it: Literally, by dividing total liabilities by total equity. Strive for an industry-standard ratio, and not too much debt.

10. Return on Investment (ROI)

ROI measures the profitability of an investment relative to its cost. So what? Keeping an eye on the ROI lets a business know how well it’s spending cash — on marketing or new equipment, for example — on projects. All said and done: ROI Net Profit of Investment ÷ Cost of the Investment x 100

Inventory Turnover

Even if inventory turnover is not one of the most monitored metrics, it’s crucial in a line of business where a business is dealing with a physical product. This simply refers to how often a company turns over its entire inventory within a given time frame.

• Why it matters: High inventory turnover indicates efficient inventory management and strong sales. Conversely, low turnover suggests issues such as overstocking or weak sales, which could lead to increased storage costs and potential cash flow problems.
• How to trace it: Calculate inventory turnover by dividing the cost of goods sold by the average inventory during a specific period. However, this metric helps gauge how effectively inventory is being sold and replenished.

Conclusion

Tracking these eleven financial KPIs provides SMEs with crucial insights into their financial health, operational efficiency, and profitability. Key metrics such as revenue growth, gross profit margin, and net profit margin highlight profitability, while cash flow, accounts receivable turnover, and accounts payable turnover focus on liquidity and cash management. The current ratio and debt-to-equity ratio gauge financial stability, and ROI measures the effectiveness of investments. Inventory turnover helps monitor stock and sales efficiency. These metrics are essential not only for accountants but also for business owners seeking to make informed decisions, address financial challenges, and drive long-term growth.