5 Key Financial Metrics Every Business Owner Should Track

Nitin was a 22-year-old boy who started a small lemonade stand in his neighbourhood. In his first month, he sold 50 cups at ₹10 each, earning ₹500. He spent ₹200 on lemons, sugar, and cups, leaving him with a ₹300 profit.

The following month, Nitin sold 80 cups (₹800 revenue), but his costs increased to ₹350 because he bought better ingredients. His profit was ₹450. He also spent ₹100 on a new signboard to attract more customers.

By the third month, Nitin sold 120 cups (₹1,200 revenue) with ₹400 in costs. After paying his younger sister ₹50 to help, his final profit was ₹750. He was happy but wondered – was his business really growing? How could he track it better?

We will read this in the blog.

1. Revenue

Revenue is the total money a business earns from selling its products or services before subtracting any expenses. It is often called the "top line" because it appears at the top of a company's income statement. 

Tracking revenue helps business owners understand how well their products or services are selling. It is a key indicator of business performance and growth.

Let's look at an example of a boy named Karan who sells handmade greeting cards.

In January, Karan sold 100 cards at ₹20 each, earning ₹2,000 in revenue. By March, his sales increased to 200 cards, resulting in ₹4,000 in revenue. This growth shows that Karan's business is doing well.

Monitoring revenue over time helps Karan make informed decisions, like increasing production or exploring new markets.

2. Gross Profit Margin

Gross Profit Margin is the percentage of money a business keeps after paying for the direct costs of making or buying its products. It shows how much profit is made from sales before paying for other expenses like rent or salaries. A higher margin means the business is more profitable.

Formula:

Gross Profit Margin (%) = (Revenue – Cost of Goods Sold) ÷ Revenue × 100

Let’s see an example of a boy named Suresh who sells handmade notebooks.

In each month, Suresh earns a 40% gross profit margin. This means he keeps ₹40 from every ₹100 of sales after covering the cost of making the notebooks. Tracking this helps Suresh understand how profitable his products are.

3. Net Profit Margin

Net Profit Margin shows how much money a business keeps as profit after paying all its costs. It is shown as a percentage. A higher percentage means the business is making more profit from its sales.

How to calculate Net Profit Margin:

Net Profit Margin = (Net Profit / Revenue) × 100

Example: Lokesh's Business

Lokesh runs a small shop. Here are his numbers for the month:

Calculation:

Net Profit Margin = (10,000 / 50,000) × 100 = 20%

This means Lokesh keeps ₹20 as profit for every ₹100 he earns. Tracking Net Profit Margin helps Lokesh understand if his business is doing well and where he can improve.

4. Return on Investment 

Return on Investment (ROI) is a simple way to see if your money is working well for you. It tells you how much profit you made compared to how much you spent. A higher ROI means you earned more from your investment.

How to Calculate ROI:

ROI = (Profit / Cost of Investment) × 100%

Example: Rakesh’s Small Business

Rakesh started a small business selling handmade soaps. Here is how his investment turned out:

Rakesh invested ₹10,000 and earned ₹15,000 in return. His profit was ₹5,000. Using the formula:

ROI = (5,000 / 10,000) × 100% = 50%

This means Rakesh made a 50% return on his investment, indicating a successful business venture.

5. Cash Flow

Cash flow shows how much money comes in and goes out of a business. It helps you understand if your business has enough cash to pay bills, buy supplies, and grow. Positive cash flow means more money is coming in than going out. Negative cash flow means the business is spending more than it earns.

Example: Mayank's Juice Stall

Mayank runs a small juice stall. Here is his cash flow for one month:

Mayank's net cash flow is ₹8,000, which is positive. This means he has extra cash to save or invest in his business.

Conclusion

Tracking these five financial metrics – revenue, gross profit margin, net profit margin, ROI, and cash flow – helps business owners understand their business health. By checking these numbers regularly, they can see if they are making money, spending wisely, and growing. Simple examples like Karan, Suresh, and Mayank show how these metrics work in real life. Good financial tracking leads to better decisions and success. Start monitoring today!

FAQs

1. Why is tracking revenue important?

It shows how much money your business is earning from sales.

2. What does gross profit margin tell you?

It tells you how much profit you make after covering product costs.

3. Why is cash flow important for a business?

It helps you know if you have enough money to pay bills and grow.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?