To help entrepreneurs understand the most crucial financial metrics to track, we asked 16 business leaders and financial experts to share their insights. From monitoring the current ratio for financial safety to focusing on customer churn, these CEOs, founders, and managers provide valuable advice on the key metrics to keep an eye on for business success.
- Monitor Current Ratio for Financial Safety
- Track Employee Compensation to Revenue Ratio
- Focus On Time-to-Market Competitiveness
- Watch Your Runway
- Know the Importance of the Cash Conversion Cycle
- Ensure Financial Health With Cash Flow
- Look at Your Net Revenue Retention
- Examine Health Write-Offs
- Understand Burn Rate Impact
- Keep Track of Weekly Revenue Growth
- Manage Accounts Payable Wisely
- Optimize Gross Margin for Growth
- Check Customer Acquisition Cost
- Audit Monthly Recurring Revenue
- Observe Your Working Capital
- Center on Customer Churn
Monitor Current Ratio for Financial Safety
As a fledgling entrepreneur, it is easy to fall into the trap of being predominantly focused on ROI (return on investment) and gross profit. They’re both important, yes, but you must also remember the metric widely known as the Current Ratio.
It compares the amount of money you need for all your short-term expenses, such as taxes or debts, with all the rest. A high ratio means your company is doing so well that you’re financially safe and ready for whatever the world throws at you.
Natalia Brzezinska, Marketing and Outreach Manager, ePassportPhoto
Track Employee Compensation to Revenue Ratio
Entrepreneurs keep track of various financial metrics, which can vary greatly depending on the business’s industry and goals.
Typically, these metrics include tracking income versus expenses, cash flow, customer lifetime value (CLV) and return on investment (ROI). One important metric that entrepreneurs should not overlook is the employee compensation to revenue ratio.
This metric measures how much a company spends on labor costs relative to its total revenue. By tracking this metric, entrepreneurs can more easily identify opportunities to reduce labor costs in order to drive increased profitability without sacrificing essential services or job security for employees.
Tasia Duske, CEO, Museum Hack
Focus On Time-to-Market Competitiveness
I remember back in my early entrepreneurial days, the significance of the time-to-market metric dawned on me. It’s not just about the financial numbers on paper.
This metric essentially signifies how fast you’re able to launch a product or service in the market after its initial concept. For instance, if you’re developing an innovative banking app, the time it takes from ideation to making it available for customers directly affects your financial bottom line.
A longer time to market might allow competitors to swoop in, leading to missed opportunities and revenues. Tracking this diligently gives you a sense of urgency and helps in timely course correction. It was a game-changer for me, and I believe it can be the same for other entrepreneurs.
Lorien Strydom, Executive Country Manager, Financer.com
Watch Your Runway
It’s so important for entrepreneurs to track their runway. This metric essentially tracks how many months the business has before it runs out of funds. The longer your runway is, the more time you have. The shorter your runway is, it’s safe to say you have some damage control to do.
Christy Pyrz, Chief Marketing Officer, Paradigm Peptides
Know the Importance of the Cash Conversion Cycle
Financial metrics allow entrepreneurs to measure their successes and failures and track progress. One important financial metric for entrepreneurs to track is the Cash Conversion Cycle (CCC), which reflects how quickly a firm can convert its investments into cash; the shorter the CCC, the better.
For example, CCC considers Accounts Receivable (money customers owe), Accounts Payable (money firms that owe vendors), and Inventory Cost of Goods Sold (the cost of buying inventory, then selling it).
Tracking CCC helps entrepreneurs understand when they need more capital or additional financing, as well as when they have excess cash to reinvest in their business.
Julia Kelly, Managing Partner, Rigits
Ensure Financial Health With Cash Flow
Entrepreneurs must track cash flow as it provides insight into the financial health of the business. Positive cash flow is essential to fund day-to-day operations, pay employees, and invest in growth opportunities. Negative cash flow can lead to financial challenges.
Entrepreneurs can use various tools, such as spreadsheets, accounting software, and cash flow forecasting models, to track cash flow. Regular monitoring enables informed decisions about pricing, marketing, and business strategies to ensure financial health and sustainability in the long term.
Johan Hajji, CEO and Founder, UpperKey
Look at Your Net Revenue Retention
Net Revenue Retention (NRR) is one of the most powerful metrics entrepreneurs should track. The NRR is the total amount of revenue from a group of customers you receive one year, compared to the total revenue from that same group of customers the previous year.
For example, if you have a SaaS company with 100 customers that paid you $1M in 2021, and those same 100 customers paid you a total revenue of $1.5M in 2022, then your NRR is 150%.
If NRR increases, your product delivers more value to customers over time. As long as your product has customers coming back and purchasing more from you, you have solved the most important challenge in business—how to deliver value repeatedly to a customer and have them pay you for it. From that position, you are almost certain to have a successful business; the question is just how big you will get.
Lachlan De Crespigny, Co-founder and Co-CEO, Revelo
Examine Health Write-Offs
Write-offs are an essential financial metric as they provide insights into the overall health of a business by revealing the expenses that cannot be recovered. These may include bad debts, obsolete inventory, or uncollectible accounts receivable.
By keeping a close eye on write-offs, entrepreneurs can identify areas in their business that require improvement, adjust strategies, and make well-informed decisions. Tracking write-offs can help entrepreneurs maintain a lean operation, minimize tax liabilities, and ultimately improve their bottom line.
Overall, the significance of monitoring write-offs cannot be understated, as it is a vital component in ensuring the financial success and sustainability of an entrepreneur’s venture.
Ray Schultz, VP of Marketing, Liquid Rubber
Understand Burn Rate Impact
Knowing your financial metrics is crucial for an entrepreneur. One of the most important metrics to track is your burn rate, which is the rate at which your business is spending money.
By tracking your burn rate, you can understand how long your company can continue to operate with the cash you have on hand. It’s important to know your numbers inside and out so you can make informed decisions that will lead to long-term success.
Loren Howard, Founder, Prime Plus Mortgages
Keep Track of Weekly Revenue Growth
Weekly Revenue—it’s the only thing that matters in the beginning. Measure it weekly because you need a comparative timeframe to show growth, but that removes day-of-week seasonality. You want to see revenue growth. Although cost is important, growth when getting started is critical. Manage costs later once you get out of the growth phase.
Jon Utz, Sr. Manager, Customer Experience Analytics, Coinbase
Manage Accounts Payable Wisely
It’s not glamorous, and investors will never ask you for it, and no one ever puts it on their pitch deck, but knowing what your accounts payable looks like is a critical metric.
Most entrepreneurs focus on revenue coming in and expenses going out. It is easy; it is current, and it tells you how well you are doing today. But they track when money comes in or out of your accounts.
Accounts payable keep track of what you have committed to spend behind your known fixed costs like salary and rent—and over-committing on that spend is how you get too far over your skis and wipe out.
It is easy to put stuff on a credit card and account for it when you pay the card, but you should put every swipe of that card down as payable when you commit. The same goes for your SaaS commitments, outside consultants, and anything you need to pay in the future. When you calculate your runway, you need to include those obligations.
Eric Miller, Co-owner and Principal, PADT, Inc
Optimize Gross Margin for Growth
Gross margin is the financial metric that entrepreneurs should relentlessly track. It is the percentage difference between the total revenue earned and the cost of goods sold.
A healthy gross margin shows that a business is generating enough revenue to cover its operating costs and has enough left over to reinvest in the company’s growth.
It is a measure of profitability that accounts for the efficiency of a company’s pricing strategy, procurement processes, and production costs.
Gross margin also provides important insights into the company’s competitive positioning, as it can evaluate how effectively the business is controlling costs and managing pricing pressure from the market. Hence, to optimize growth and long-term viability, entrepreneurs must continuously monitor and improve their gross margin.
Tarun Saha, Co-founder and CEO, StallionZo
Check Customer Acquisition Cost
As a food blogger selling recipe eBooks, understanding my Customer Acquisition Cost (CAC) has been crucial. CAC reflects the average cost of acquiring a new customer, including marketing and sales expenses.
By tracking my CAC, I’ve gained insights into the most effective marketing channels and strategies, helping me optimize my efforts and allocate resources efficiently.
Monitoring CAC also helped me set eBook pricing to cover customer acquisition costs while maintaining profitability. Overall, tracking CAC has been vital to my success and growth as a food blogger and entrepreneur.
Corrie Duffy, CEO and Founder, Corrie Cooks
Audit Monthly Recurring Revenue
One essential financial metric for entrepreneurs to track is the Monthly Recurring Revenue (MRR).
The reason behind this importance is how it reflects the predictable income a company generates every month. In addition, tracking MRR allows us to measure business health and performance from various perspectives.
For example, if we consider subscription-based businesses like SaaS companies, monitoring MRR helps identify potential trends or changes over time. This insight assists with forecasting future revenue streams accurately.
Ryan Gray, CEO, Name Hero
Observe Your Working Capital
Working capital is a financial metric that measures a company’s ability to cater to its immediate expenses with its available liquidity. It paints a picture of the current financial health of your business.
This metric is calculated by subtracting the total value of current liabilities from the total value of current assets.
Current liabilities comprise accounts payable, debt payments, taxes, and payroll, while current assets include accounts receivable, available cash, and the current value of short-term investments.
It’s important for entrepreneurs to monitor their working capital and have a well-thought-out strategy in the event of an unplanned business expense.
Dr. Willy Portier, Co-founder, Concerty
Center on Customer Churn
The most important metric is customer retention or the opposite of retention—customer churn. Churn is the silent killer of company growth, leaving companies chasing their tails to get more customers that they won’t be able to keep.
Our tracking shows that 15-30% of churn can be resolved at the moment of cancellation, which is why it is critical to ensure that churn is tracked in real-time.
Suezann Holmes, CEO, ScaleXP