Do you want to know the financial health of your business? To do this, one of the most accurate data sets is the one offered by financial management indicators. These are part of the metrics used by organizations to measure their performance.

They are applied in multiple areas since they are analysis tools and, as such, offer accurate information to understand the situation of a company and, based on it, make better decisions. In this article, we will explore the essential metrics that SMEs should monitor to ensure a healthy financial position.

Liquidity Ratios In Your Business Financial Health

Liquidity ratios measure the ability of a company to meet short-term financial obligations. These ratios demonstrate your SME’s ability to cover its current liabilities with its current assets. The following are critical liquidity ratios:

Current Ratio: Calculated by dividing current assets by current liabilities, the current ratio provides an overview of your SME’s short-term liquidity. Aim for a ratio higher than 1, indicating that you have enough assets to cover your liabilities.

Quick Ratio: Also known as the acid test ratio, the quick ratio is similar to the current ratio but excludes inventory from current assets. This ratio offers a more conservative estimate of liquidity, ensuring that your SME can meet its obligations without relying on the sale of inventory

Accounts receivable: This financial indicator shows how well a business charges what its customers owe it. These accounts receivable can represent a major liquidity problem if they are not settled in a consistent timeframe, so it is important to measure this KPI. To do so, take the total earnings of a given period and divide them by the average accounts receivable.

Profitability Indicators In Your Business Financial Health

These KPIs measure a company’s ability to make a profit. Therefore, they help determine how well a business is performing in terms of generating income while keeping expenses low.

To make this analysis and measurement, these financial indicators take the income obtained and compare it with the different categories of expenses of the organization.

Some examples of profitability indicators are:

Gross Profit Margin: This metric measures the profitability of each sale after deducting the cost of goods sold. It is calculated by dividing gross profit by total revenue. A higher gross profit margin indicates effective cost management and pricing strategies.

Operating profit margin: This indicator determines how much money is left after covering product costs and operating expenses. Considering that these costs are the ones a company needs to develop its activity, this margin is key to determining the business’s pricing strategy.

Net profit margin: This is the percentage of remaining income after operating expenses, interest, and taxes have been deducted from total income.

Efficiency Metrics In Your Business Financial Health

Efficiency metrics evaluate how well your SME utilizes its resources to generate revenue. By monitoring these metrics, you can identify areas where improvements can be made. Consider the following:

Accounts Receivable Turnover: This metric measures how quickly your SME collects payments from customers. A higher ratio indicates effective credit management and timely collection of receivables, resulting in improved cash flow.

Inventory Turnover: Inventory turnover reveals the number of times your SME sells and replaces its inventory within a given period. A higher turnover indicates efficient inventory management and reduces the risk of obsolete stock or cash tied up in inventory.

Debt Management Ratios In Your Business Financial Health

Debt management ratios offer insights into how effectively your SME manages its debt and financial obligations. These metrics help assess your SME’s ability to meet long-term debt commitments. Key ratios include:

Debt-to-Equity Ratio: This ratio measures the proportion of debt to equity financing in your SME’s capital structure. A lower ratio indicates a stronger financial position and a decreased risk of insolvency.

Interest Coverage Ratio: The interest coverage ratio assesses your SME’s ability to meet interest payments on its debt. It is calculated by dividing earnings before interest and taxes (EBIT) by interest expenses. A higher ratio indicates a healthier financial position and better debt management.

Conclusion

Undoubtedly, if you hope to stand a chance in the business world this is the most practical and agile way to track your financial indicators and measure the success of your company.