Starting a business is exciting, but it comes with its fair share of challenges. One of the biggest hurdles can be understanding and managing your finances. As a small business owner, you’re likely wearing many hats, and “financial analyst” might not be your favorite one to put on.
But here’s the thing: grasping your financial metrics isn’t just about impressing potential investors or lenders. It’s also about giving yourself the tools to make smart decisions, spot potential issues before they become problems, and ultimately, set your business up for long-term success.
In this guide, we’re breaking down the nine most crucial financial metrics that every growing small business should have on their radar. Whether you’re bootstrapping your way to success or planning to seek outside funding, these numbers will help you navigate your business’s finances with confidence.
The lender’s perspective: Why these metrics matter for funding
When you’re seeking funding, lenders are looking for a clear picture of your business’s financial health and its ability to repay a loan. Think of these financial metrics as the vital signs of your business. Just as a doctor checks your heart rate, blood pressure, and temperature to assess your health, lenders use these metrics to gauge your business’s financial fitness.
Making smart financial projections for your new business
As a newer small business, you won’t have years of financial history to show. That’s okay! Lenders understand this. What they’re looking for is evidence that you understand your business’s financials and have a realistic plan for growth. For many of these metrics, you’ll be making assumptions—or projections—about the future using the best available data.
To make smart assumptions, you’ll need to do your homework. Dive deep into your industry, study your competitors, and analyze market trends to make educated guesses. Remember to be conservative in your estimates; it’s better to under-promise and over-deliver. If lenders view your numbers as aggressive or unrealistic, they’ll adjust them to industry norms, so it’s best to show them you have a solid grasp on your business’s potential.
Your 9 must-measure metrics
1. Revenue growth rate
- What it is: This metric shows how quickly your business is growing by comparing your revenue from one period to the next. It’s an indicator of how quickly your sales are increasing.
- Why it’s important: Revenue growth rate helps you predict future business performance and make informed decisions about expansion.
- How lenders view it: Lenders prefer to see steady, consistent growth. It shows that your business is expanding and has potential for long-term success.
2. Gross profit margin
- What it is: Gross profit margin shows what percentage of revenue a company retains after accounting for the direct costs associated with producing its goods or services.
- Why it’s important: It indicates how efficiently you’re producing or delivering your product/service and helps you decide if you can afford new expenses while maintaining profitability.
- How lenders view it: A healthy gross profit margin shows good business management. Higher margins suggest better financial health.
3. Operating cash flow
- What it is: Operating cash flow is the amount of cash generated by a company’s regular business operations, excluding costs and income from investing or financing activities.
- Why it’s important: It shows your ability to pay bills and fund operations, helping you plan for future expenses and investments.
- How lenders view it: Positive and growing cash flow is highly favorable. Importantly, it gives lenders an idea of when you’ll start having positive cash flow and be able to repay your loan, often influencing loan structure (e.g. building in interest-only arrangements or providing additional working capital).
4. Customer acquisition cost (CAC)
- What it is: The cost of acquiring a new customer. CAC is calculated by dividing the total costs spent on acquiring new customers (your marketing spend) by the number of new customers acquired in a given period.
- Why it’s important: It shows how efficient you are in generating new customers and revenue.
- How lenders view it: This metric is essential to certain industries such as subscription services (shared workspaces, gyms, etc.) and e-commerce. Lenders want to ensure that your business generates enough profit from customers to repay loans and sustain operations.
5. Accounts receivable turnover
- What it is: How quickly customers pay their bills.
- Why it’s important: How quickly your customers pay for your services affects cash flow and available working capital. Slower payments can indicate potential cash flow problems.
- How lenders view it: Faster turnover suggests better cash management and is viewed favorably. Simply put, if you collect payments quicker, you’ll have more cash to repay a loan.
6. Accounts payable days
- What it is: This is a measure of how long it takes you to pay your bills to suppliers.
- Why it’s important: It’s another key metric in cash flow management. If you build good relationships with your suppliers, you can qualify for longer payment terms and therefore keep more money at work in your business.
- How lenders view it: It’s a measure of creditworthiness. Lenders consider good supplier relationships and the ability to negotiate favorable terms as positive when it comes to your business’s finances.
7. Debt-to-equity ratio
- What it is: The balance between borrowed funds (debt) and owned assets (equity). To calculate this metric, divide your total liabilities (everything you owe money on), by your shareholders equity (the amount of money you put in to start the business)
- Why it’s important: It shows how you’ve funded your business and your financial risk level.
- How lenders view it: Lower ratios generally indicate less financial risk. Lenders want to know you have “skin in the game” and aren’t overly reliant on debt.
8. Break-even point
- What it is: The point where total costs equal total revenues. To calculate break-even point, divide operating expenses by the gross profit margin. This will provide the amount of revenue that needs to be earned in order to satisfy your liabilities.
- Why it’s important: It helps in planning and assessing financial risk, showing how many sales you need to cover costs and loan payments.
- How lenders view it: Lenders view this metric as a measure of time. Typically they want to know how long it will take for a company to break-even (typically in months).
9. Working Capital
- What it is: The difference between your current assets and current liabilities, representing funds available for day-to-day operations.
- Why it’s important: This metric shows your business’s short-term financial health and ability to cover immediate obligations while funding growth.
- How lenders view it: Positive and growing working capital is favorable, indicating you can meet financial obligations and handle unexpected expenses. Low or negative working capital may be seen as a red flag. New businesses should expect some fluctuation, but aim for a positive trend. Explain to lenders your plans for managing working capital as you grow.
The bottom line: Track these metrics for better business performance and loan readiness
These metrics work together to paint a picture of your startup’s financial health. By doing your best to track these numbers regularly—likely in partnership with your business accountant—you’ll not only understand your business better but also be well-prepared when it’s time to seek financing. Remember, lenders aren’t just looking at one magic number—they’re looking at the whole story your financials tell.
Remember: you don’t need to be an expert on all these financial metrics. If you’re ready to grow your business, the best approach is to connect with a lender who can guide you through the process. They’ll help you understand these, and other, key figures and prepare your financial story, potentially unlocking the capital you need to take your business to the next level. When you feel it’s time for additional financing, don’t hesitate to reach out to a trusted lender like Grow America who can support your growth journey.