As a business owner, you know that financial figures are crucial for your business success. They help you monitor your performance, identify problems, and make smart decisions. But do you understand what these numbers mean and how to avoid common mistakes that can hurt your business?

Here are some of the most important metrics that you should keep an eye on and the pitfalls that you should avoid:

1) Revenue and Sales Figures

These numbers show how much money your business is making from providing your services to your clients. But don’t just look at the total amount; look at the trends and patterns. For example, if you notice that one of your clients is reducing their orders or delaying their payments, you might need to renegotiate your contract terms, diversify your client base, or improve your invoicing process. Failing to do so might result in cash flow problems or bad debts.

2) Gross Profit Margin

This percentage tells you how efficient your business is in delivering your services and managing your costs. It is calculated by subtracting the cost of services from the revenue and dividing by the revenue. A high gross profit margin means that you have a low cost of services and a high service fee, which is good for your profitability. However, your margin will shrink if your cost of services increases or your service fee decreases, leaving you with less money to cover your overheads.

3) Net Profit Margin

This percentage tells you how profitable your business is after deducting all your expenses from your revenue. It is calculated by subtracting all your expenses from your revenue and dividing by the revenue. A high net profit margin means that you have a good control over your costs and a high return on your services, which is good for your growth. On the other hand, your margin will erode if your expenses increase or your revenue decreases, leaving you with less money to reinvest in your business.

4) Accounts Receivable Ageing

This report shows how long it takes for your clients to pay you for the services that you have delivered to them. It is usually divided into categories such as 0-30 days, 31-60 days, 61-90 days, and over 90 days. A low accounts receivable ageing means that you have a fast cash collection cycle, which is good for your cash flow. However, your cash flow will be disrupted if you let your clients pay late or don’t follow up on overdue invoices, making it hard for you to pay your bills and suppliers.

5) Inventory Turnover

This ratio shows how quickly you use and replace your inventory of materials and supplies. It is calculated by dividing the cost of services by the average inventory value. A high inventory turnover means that you have a high demand for your services and a low inventory holding cost, which is good for your profitability. However, you might end up with overstocking or understocking problems if you ignore your inventory levels or don’t manage them properly, which can lead to waste, obsolescence, or lost opportunities.

6) Burn Rate: This metric shows how fast you are spending your initial capital before reaching profitability. It is calculated by dividing the amount of capital by the number of months until profitability. A low burn rate means that you are spending wisely and conserving cash, which is good for your survival. However, you might run out of cash before becoming profitable if you overspend or don’t generate enough revenue, forcing you to close down or seek emergency funding.

7) Customer Acquisition Cost (CAC)

This metric shows how much it costs you to acquire a new client through marketing and sales activities. It is calculated by dividing the total marketing and sales expenses by the number of new clients acquired. A low CAC means that you have an effective marketing and sales strategy and a high conversion rate, which is good for your growth. However, you will waste money and resources if you spend too much on marketing and sales without attracting quality leads or converting them into clients.

8) Customer Lifetime Value (CLV)

This metric shows how much revenue a client generates for your business over their entire relationship with you. It is calculated by multiplying the average revenue per client by the average retention rate by the average client lifespan. A high CLV means that you have loyal clients who hire you repeatedly and refer others to you, which is good for your sustainability. However, they will leave you for competitors if you neglect your existing clients or don’t provide them with value or satisfaction, reducing your CLV and hampering your revenue growth.

9) Debt-to-Equity Ratio

This ratio shows how much debt you have compared to how much equity you have in your business. It is calculated by dividing the total debt by the total equity. A low debt-to-equity ratio means that you have more equity than debt in your business, which is good for your solvency. However, you will increase your financial risk and burden if you take on too much debt without a plan to repay it, leading to missed payments or bankruptcy.

10) Return on Investment (ROI)

This ratio shows how much profit you make from an investment compared to how much you invested. It is calculated by subtracting the cost of the investment from the gain of the investment and dividing by the cost of the investment. A high ROI means that you have a high return on your investment, which is good for your growth. However, you will lose money and miss opportunities if you don’t track your ROI or invest in projects that don’t yield positive results.

These metrics are not just numbers; they are the indicators of your business’s financial health. By mastering them and avoiding these pitfalls, you can make better decisions, ensure your business’s success, and unlock its full potential.

About the authors:

Amol Maheshwari is the Managing Partner and M&A head at Growth Idea.  Shweta Jhajharia is a leading global business coach and founder of Growth Idea. Their new book Score is the ultimate handbook to help SME business owners and senior leaders master the fundamentals of finance in order to propel them towards unprecedented success.