Starting a business has become quite appealing, especially for younger people. It offers the chance to be your own boss and to launch any type of business you like. But, it’s not an easy task. You need to plan a lot, invest wisely, and put in considerable effort to build a successful business.
Even after your business is up and running, the work doesn’t stop. Continuously tracking metrics and performance data is crucial to make sure everything aligns with your goals. In this article, we’ll go over three important financial measures every business owner should know.
**Debt-to-Equity Ratio**
The debt-to-equity ratio tells you how much debt your company is using to finance its assets compared to the money shareholders have invested. A higher ratio means more debt has been used, which might not always be bad but is riskier for lenders. A lower ratio indicates that the company has grown without taking on too much debt, showing better financial health. This ratio helps you understand how well you’re using investor money and how profitable your business is.
**Free and Operating Cash Flow**
Profit is a key goal for any business, so tracking your cash flow is vital. Operating cash flow ensures you have enough money for daily operations and future sustainability. Without enough of it, your business could stall or even fail.
Free cash flow is the money left after covering all operating costs and expenses. Having plenty of free cash flow indicates your business is ready to grow, reduce debt, and explore new opportunities. You can easily calculate this by subtracting costs and overheads from your total sales.
**Return on Assets**
Return on Assets (ROA) measures how effectively your company uses its assets to generate profit. Your assets should help your business grow in some way. This ratio allows you to compare your company’s profitability with others. It’s usually shown as a percentage, calculated by dividing net income by total assets.
ROA can also be seen as Return on Investment (ROI), showing how beneficial your asset investments have been. This is a solid method for comparing companies within the same industry. Typically, an ROA above 5% is considered good.
These are just a few of the many financial metrics available to track your business’s success. Knowing your numbers is crucial—it’s hard to run a successful company without them. Many of these metrics are easy to calculate, so there’s no reason not to use them.