Tracking financial metrics is a vital part of building a successful and sustainable business, and the good news is that you don’t need to be a financial expert to understand or benefit from them.
Monitoring key business metrics like cash flow, profit margins, and liquidity ratios can give you a clearer picture of your financial health and help you make better decisions.
In this article, we outline some of the most important financial metrics for businesses and share tips on how to use them effectively.
1. Operating cash flow
What it is: Operating cash flow is the amount of cash your business generates from its core operations over a specific time period.
How to calculate it: There are two main ways of calculating operating cash flow: the indirect method and the direct method.
- Indirect method - Start with your net income (the bottom line of your income statement) and then adjust it by adding back non-cash expenses (such as depreciation, amortisation, and stock-based compensation). Then, adjust for changes in working capital (like accounts receivable, inventory, and accounts payable).
Operating cash flow = net income + non-cash expenses – increase in working capital
- Direct method – this involves listing all the cash transactions related to your operating activities, such as cash received from customers and cash paid to suppliers or employees, and calculating operating cash flow by subtracting total cash outflows from total cash inflows.
Operating cash flow = cash revenue – operating expenses paid in cash
Many businesses prefer the indirect method because it’s simpler to prepare using existing financial statements. The direct method requires collecting and organising detailed cash transaction records, but it offers greater visibility into actual cash inflows and outflows.
Why it’s useful: The operating cash flow metric provides a clear, reliable view of a company’s ability to generate cash from its core operations to fund day-to-day activities and invest in growth, without relying on external financing. If your operating cash flow is weak or declining, you might consider steps like speeding up customer payments, cutting unnecessary costs, or reviewing supplier payment terms.
Read our guide to cash flow for a more in-depth explanation of what cash flow is and ways of improving it.
2. Gross profit margin
What it is: Gross profit margin is the percentage of money from sales that you have left after you’ve deducted the costs of producing your goods or services.
How to calculate it: Firstly, you need to work out your gross profit, which you can do by subtracting the cost of goods sold (COGS) from your total revenue. Then, divide your gross profit by your total revenue, and multiply the result by 100.
Why it’s useful: Your gross profit margin gives insight into how efficiently your business is producing and selling its products or services. A higher margin generally indicates a profitable business with effective management of production costs and/or a strong pricing strategy. To increase gross profit margin there are a number of strategies you could implement, such as streamlining your product offering, negotiating better deals with suppliers, and reducing waste and inefficiency.
3. Net profit margin
What is it: Net profit margin is the percentage of money from sales that you have left after you’ve deducted all expenses.
How to calculate it: Determine your net profit by subtracting all expenses from total revenue. Then divide your net profit by total revenue and multiply the result by 100.
Why it’s useful: Net profit margin shows how efficiently your business converts revenue into actual profit. Unlike gross profit margin, it takes all expenses into account and not just those directly related to production, so it provides a broader view of overall profitability. You can improve net profit margin by increasing revenue (through more sales or carefully considered price increases), streamlining operations, and controlling costs.
4. Debt to equity ratio
What is it: The debt to equity ratio compares the amount of debt relative to the amount of shareholders’ equity, indicating the proportion of your business’s assets that are financed by debt.
How to calculate it: Divide your total liabilities (what your business owes to others) by shareholders' equity (your total assets minus total liabilities).
Why it’s useful: This is a key metric often used by potential lenders and investors to assess a company’s financial health. A higher debt to equity ratio suggests that the business relies more heavily on borrowed funds, which may indicate greater financial risk. However, what qualifies as a “healthy” ratio varies by industry. For example, businesses in capital-intensive industries like manufacturing will often have a higher debt to equity ratio due to large upfront investments in assets.
To find out more, read our article on the differences between equity and debt.
5. EBITDA
What is it: EBITDA (pronounced "ee-bit-dah") is one of the most widely used metrics for evaluating a company’s financial health and ability to generate cash flow. Lenders often use it to assess a company’s ability to repay debt, while investors use it to help them value businesses.
How to calculate it: Start with your business’s net income (earnings), then add back interest expenses, taxes, depreciation, and amortisation.
Why it’s useful: EBITDA helps assess your company’s operational performance and profitability by focusing on earnings generated from core business activities.
To learn more about calculating and using this metric, read our guide to EBITDA.
6. Working capital
What it is: Working capital measures the difference between your current assets and current liabilities, representing the amount of liquid assets your business has available to meet short-term financial obligations.
How to calculate it: Subtract current liabilities from current assets.
Why it’s useful: Working capital is crucial for maintaining short-term financial stability and supporting long-term growth. It ensures your business can cover day-to-day expenses like paying suppliers and employees on time. It can also allow you to take advantage of growth opportunities, such as investing in product development or hiring more staff. There are various ways to improve working capital, including optimising inventory management, speeding up customer payments, and negotiating extended payment terms with suppliers.
7. Current ratio
What it is: The current ratio (sometimes called the working capital ratio) compares current assets to current liabilities, providing a measure of your business’s ability to cover short-term obligations. A higher current ratio generally indicates a stronger liquidity position.
How to calculate it: Divide current assets by current liabilities.
Why it’s useful: The current ratio shows how many times over your business can pay its short-term obligations using current assets. A good ratio varies by industry, but in general, a range between 1.5 and 3 is often considered healthy. Too low may signal liquidity risk, while too high can indicate that your business isn’t using its assets efficiently. It’s helpful to compare your ratio to your industry average to understand whether it’s within a typical range.
How to use financial metrics effectively
Here are some tips to bear in mind when tracking financial metrics:
- Avoid tracking too many metrics at once. Monitoring too many metrics can lead to information overload and dilute your focus. Stick to the ones that matter most.
- Make sure they align with your business goals. Focus on metrics that support your strategic objectives - whether that’s improving cash flow, increasing efficiency, or driving growth.
- Keep them up to date. Regularly review your metrics to make sure they remain relevant to your current priorities.
- Analyse the numbers in context. Avoid taking numbers at face value or relying on single metrics in isolation. Look at related metrics and dig into the reasons behind any changes before you make decisions.
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