Essential Financial Metrics Every Small Business Owner Should Track

Know your numbers to ensure long-term business success.

As a small business owner, managing finances effectively is crucial for survival and growth. While it may seem overwhelming at first, tracking the right financial metrics can provide you with the insights needed to make informed decisions and guide your business towards sustained profitability.

In this post, we’ll cover the top financial metrics every SME in Singapore should monitor, so you can keep your business healthy, avoid common financial pitfalls, and plan for long-term success.

1. Cash Flow

Why It’s Important:

Cash flow is the lifeblood of any business. It represents the money coming in and going out of your business. A positive cash flow means you have enough funds to cover your expenses, pay employees, invest in growth, and handle emergencies. Without sufficient cash flow, even profitable businesses can run into trouble.

How to Track:

• Monitor cash inflows (sales revenue, loans, investments)

• Track cash outflows (rent, utilities, employee salaries, suppliers)

• Review your cash flow statement monthly.

Example:

John’s Local Café in Singapore carefully tracks cash flow by reviewing bank statements weekly. When he noticed a dip in cash flow during a slow season, he adjusted his marketing efforts to boost sales, ensuring the café maintained a healthy cash reserve.

2. Gross Profit Margin

Why It’s Important:

Your gross profit margin shows how efficiently you produce your product or service. It’s calculated by subtracting the cost of goods sold (COGS) from your revenue and dividing it by total revenue. A healthy gross profit margin indicates that you’re generating enough profit to cover operational costs and reinvest in your business.

How to Track:

Formula: Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue × 100

Example:

Elaine’s Online Apparel Store has a gross profit margin of 40%. This means for every $1 in sales, she earns 40 cents after accounting for the cost of her materials and production. Elaine uses this margin to decide on pricing strategies, ensuring she remains competitive while maintaining profitability.

3. Net Profit Margin

Why It’s Important:

The net profit margin is a comprehensive measure of your business’s profitability after all expenses (including operating costs, taxes, and interest) have been deducted from your revenue. This metric helps you understand the true profitability of your business.

How to Track:

Formula: Net Profit Margin = Net Income / Revenue × 100

Example:

Daniel’s Web Development Agency had a net profit margin of 15%. This means that after paying all expenses, Daniel keeps 15% of his revenue as profit. He uses this to evaluate how well his business is performing compared to industry standards.

4. Accounts Receivable Turnover

Why It’s Important:

This metric shows how quickly your business collects outstanding invoices. A high turnover rate means you're getting paid quickly, while a low turnover rate may indicate cash flow problems or poor payment collection practices.

How to Track:

Formula: Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

Example:

Siti’s Digital Marketing Firm tracked her accounts receivable turnover and realised that it took her clients longer than average to settle invoices. By tightening payment terms and offering early payment discounts, she improved her cash flow and reduced outstanding receivables.

5. Current Ratio

Why It’s Important:

The current ratio helps determine whether your business has enough short-term assets (like cash, receivables, and inventory) to cover its short-term liabilities (such as bills and loans). A ratio of less than 1 indicates potential liquidity problems, while a ratio over 2 suggests strong financial health.

How to Track:

Formula: Current Ratio = Current Assets / Current Liabilities

Example:

Tiong’s Import Business has a current ratio of 1.5, meaning that for every dollar of liability, he has $1.50 in assets to cover it. He reviews this ratio quarterly to ensure his business can meet its short-term obligations.

6. Debt-to-Equity Ratio

Why It’s Important:

This ratio measures the amount of debt your business has relative to its equity. A high debt-to-equity ratio can be risky, especially if your business isn’t generating enough income to service the debt. On the other hand, a lower ratio suggests that you are relying more on equity financing, which may limit your growth potential.

How to Track:

Formula: Debt-to-Equity Ratio = Total Debt / Total Equity

Example:

Chia’s Furniture Manufacturing Business kept track of her debt-to-equity ratio and saw that her reliance on debt was increasing. She worked with a financial advisor to restructure her financing strategy, opting for a mix of SME loans and equity funding, which helped her lower the ratio and reduce financial risk.

7. Return on Investment (ROI)

Why It’s Important:

ROI measures the profitability of your investments. Whether it’s in marketing, equipment, or new staff, understanding your ROI helps you allocate resources to initiatives that drive growth. It’s essential to track this metric for every major business decision.

How to Track:

Formula: ROI = (Revenue from Investment - Cost of Investment) / Cost of Investment × 100

Example:

Maya’s Retail Boutique invested in a targeted Facebook ad campaign. After tracking the ROI, she found that for every $100 spent, the campaign generated $500 in sales. This insight helped her decide to increase her ad spend and expand her marketing efforts.

8. Operating Expenses Ratio

Why It’s Important:

Your operating expenses ratio indicates the proportion of your revenue spent on operating costs. Keeping a close eye on this metric helps ensure that you’re not overspending on unnecessary expenses and can maintain healthy profit margins.

How to Track:

Formula: Operating Expenses Ratio = Operating Expenses / Revenue × 100

Example:

Raj’s Wholesale Distribution realised that operating expenses were rising faster than revenue growth. By cutting unnecessary overhead costs and renegotiating supplier contracts, Raj managed to reduce the ratio and improve profitability.

How Devise Singapore Can Help with Financial Management

Running a small business is a balancing act, and managing these key financial metrics can be daunting. If you find yourself needing additional support to fund your growth or bridge cash flow gaps, Devise Singapore offers SME financing solutions tailored to your needs. From working capital loans to cash flow management, Devise Singapore provides resources to help you meet your financial goals.

Whether it’s improving your cash flow or securing funds to invest in growth, Devise Singapore can help you make the right financial decisions at the right time.

Final Thoughts: Master Your Metrics for Success

Understanding and tracking essential financial metrics is crucial for the success of any small business. By staying on top of your cash flow, profit margins, and other key metrics, you can make informed decisions, secure financing, and ensure long-term success.

Need help managing your business finances?

Reach out to Devise Singapore to explore financial solutions that can help your SME grow sustainably.