Performance indicators are necessary management tools for any entrepreneur. After all, the evaluation of the level of performance in each sector of the business is important for company growth and for the adjustment of problematic processes.
Financial indicators, certainly, belong to the most important indicators for small businesses. They help to get information on corporate finances and the financial condition of your company.
But do you know what the main financial indicators are for small businesses? Then continue reading this article and discover 6 essential financial indicators for small businesses!
6 Key Financial Indicators for Small Businesses
Before learning what the main financial indicators for a small business would be, make sure you comprehend the significance that these performance indicators have for all businesses.
Now, financial indicators are closely interlinked with effective management of small business. Entrepreneurs should have the means to analyze what’s going around the business for which they built it. Decision-making related to finances is therefore possible through information given by indicators.
Below you will find 6 of these financial indicators for small businesses that you cannot miss:
Fixed costs
Fixed costs are all of a business’s recurring expenses. They are those that are repeated month after month or vary little over time. No matter what happens, they must always be paid monthly.
Office rent, cleaning and security expenses, taxes, among others are considered fixed costs for small businesses.
Variable costs
Variable costs, in turn, are all expenses that vary monthly, according to the productive activities of a business. Raw materials and production inputs (such as water, energy, etc.) and sales commissions are examples of variable costs.
Both fixed and variable costs represent elementary financial gauges for a small business. Lacking an estimate of both costs, an entrepreneur will have no idea of the volume he has to produce and sell just to cover all company expenses –and make some net income.
Cash flow
Control of the amount entering and leaving the company’s account over a given period means cash flow. The entrepreneur is, therefore, able to ascertain the business’s income and financial obligations by this indicator.
And it is thanks to this that it becomes possible to analyze and monitor whether the company’s operations are generating enough cash to avoid debt and generate profit over time.
Without knowing the cash flow, the entrepreneur runs serious risks of making wrong financial decisions and seeing his business sink into debt.
Breakeven Point
One of the most significant financial metrics of a small business is the break-even point, the minimum revenue the business must achieve to recover all its costs and expenses.
Knowing the break-even point lets the manager understand the amount of sales (or business) he needs to make within a particular period so as not to make any profit nor loss. Once results are beyond the break-even point, the business makes profits; results lower than the break-even point would imply financial loss.
EBITDA Margin
EBITDA margin is a company’s earnings before interest, taxes, depreciation and amortization. It represents the amount of profit or loss a company makes without taking into account discounts for interest, taxes, depreciation or amortization.
The EBITDA margin therefore provides the entrepreneur with information about the value and impact of sales on cash flow. This indicator is therefore calculated based on net operating profit + depreciation + amortization.
Market Share
Finally, Market Share – also called market share – is another important financial indicator that is essential for small businesses. It is also an important performance measurement tool.
Market Share helps entrepreneurs identify the market share in which their business has a share. A company that offers telephone services, for example, may have x% market share in a specific region of the country – or in the entire national territory.
By using this indicator on a daily basis, the company can discover its market share in percentage terms – and discover whether it is a leader in its segment or whether it needs to rethink its strategies to improve its results and grow.
Conclusion
Financial indicators are necessary for small businesses in their desire for growth and sustainable development over time.
If used properly, they help an entrepreneur have a more panoramic view of the business and make good financial decisions. And that’s why you, as a small entrepreneur, need to know them and understand how they work.
