Financial reporting: Key metrics every business owner should monitor

Every business aspires to make money and grow their company. However, they need to manage their finances as frugally as possible.

That’s where financial reporting – the act of analyzing, summarizing, and communicating financial performance – comes into play.

When it comes to financial management, you must measure your financial status against well-defined key performance indicators (KPIs). But as a business owner, what key metrics should you consistently monitor and measure?

This article offers financial tips for aspiring entrepreneurs and existing business owners. Learn what KPIs to track and explore some best practices for financial reporting.

What is financial reporting?

Financial reporting is the process of examining, summarizing, and conveying your business’s financial performance and status to various stakeholders, such as:

Business executives
Investors
Creditors
Regulators

In the financial reporting process, you provide a clear overview of your company’s profitability, liquidity, and solvency. You start by recording, tracking, and analyzing all your financial transactions and activities, which occur all year round. Then, you create and present financial paperwork, such as:

Balance sheets
Income statements
Cash flow statements
Annual reports

Note that financial reporting holds you accountable for financial stewardship. However, the ultimate goal is to enable various stakeholders to assess your company’s financial health. That allows all stakeholders involved to make informed business decisions and improve your financial position.

Find out how effective financial reporting can benefit your organization below.

The key benefits of effective financial reporting

Financial reporting is a crucial part of business. It’s the end part of your bookkeeping and accounting processes as part of your financial management. However, it determines your business decisions, day-to-day operations, and future investments.

Here’s how it proves beneficial to your organization:

Guaranteed financial stability and growth: Effective financial reporting offers a clear picture of your company’s financial health. It provides valuable insights for long-term growth initiatives to promote stability.
Consistent financial cash flow: Robust financial reporting helps you strike a balance between your income and expenses. It allows you to spend less than you earn for your business to guarantee enough cash flow. Note: One in five small businesses fail during the first year, 30% in the second year, and 50% in their fifth year due to cash flow problems.

Effective financial risk management: Financial reporting lets you examine your business finances and identify investment risks. This enables you to mitigate potential risks, protect your assets, and ensure financial stability.
Informed financial decision-making: Streamlined financial reporting can guide financial planning and decision-making. It helps you manage your finances better, allocate resources strategically, and invest wisely.
Increased investors’ trust and confidence: Access to comprehensive financial reports can boost your investors’ trust and confidence in your business. Such transparency lets them make informed decisions for their interests and your business – a win-win for both parties!
Ensured transparency and accountability: Financial reporting presents clear financial data of your organization, promoting transparency. Not only does it hold you accountable for your financial stewardship, but it also helps build trust among your stakeholders.
Guaranteed legal and regulatory compliance: Financial reporting usually considers adherence to laws and regulations. This helps your company minimize the risk of financial losses and legal consequences.

As a business, discover the KPIs used for financial reporting in the next section.

The seven key metrics for measuring financial performance

Key metrics serve as financial health checks for your business. They reveal financial information like how profitable your company is, how efficiently you use your resources, and how easily you can pay your debts. By monitoring your KPIs, you can manage and boost your finances better.

Read on for seven KPIs to set and track as part of your financial reporting for your business.

1) Revenue metrics

Revenue metrics track your company’s financial performance in terms of money creation. They measure KPIs, such as total revenue, growth rate, and recurring revenue. As you can see, they provide valuable insights into your sales trends, expansion rates, and income stream.

Tim White, Founder of milepro, highlights the value of revenue metrics for financial reporting. “Understanding your revenue numbers is like comprehending the language of your business success. It’s not just about the numbers; it’s about understanding the story they tell and applying it to guide your financial journey ahead.”

Total revenue is the sum of your company’s income from its business operations and other sources. In short, it mirrors your entire sales performance.
Revenue growth rate is the percentage increase in your company’s revenue over a given period. It reflects the rate of your sales expansion or contraction.
Recurring revenue is the money derived from recurring sales or subscriptions. It provides your business with a predictable and reliable income stream.

2) Profitability metrics

Profitability metrics assess your company’s ability to generate profits from all financial activities and investments. They provide critical information about its financial performance in generating returns.

Ian Sells, CEO of Million Dollar Sellers, cites the value of profitability metrics for financial reporting based on business experience. “Our financial strategy is built on profitability criteria, which guide us toward long-term growth and profitability. Maximizing these indicators ensures that every facet of our operations contributes to our bottom line.”

Gross profit margin is the percentage of revenue that remains after removing the cost of products sold. It reflects your company’s financial performance in earning profit from its core operations.

Net profit margin is the percentage of income that turns into profit after deducting all expenses. As such, it shows your company’s overall profitability and cost management.
Return on investment (ROI) analyzes your investment profitability in relation to its cost. It represents a percentage to aid you in determining investment profitability, efficiency, and strategy.

3) Liquidity metrics

Liquidity metrics analyze your company’s capacity to satisfy short-term financial obligations promptly. They offer information about your organization’s economic stability and flexibility.

Phil Strazzulla, Founder of SelectSoftware Reviews, underscores the importance of liquidity metrics for financial reporting. “They are the lifeblood of financial agility, allowing your company to traverse your business cycle’s ups and downs seamlessly. By monitoring these metrics, you can avoid potential cash shortages and remain resilient during challenging times.”

Current ratio compares your company’s short-term liabilities to its short-term assets. It helps you evaluate your company’s liquidity, demonstrating your ability to satisfy immediate financial obligations.
Quick ratio is a more conservative measure of liquidity than the current ratio. Also known as the acid-test ratio, it measures your company’s capacity to meet its short-term commitments with its most liquid assets, excluding inventories.

Cash flow is the net amount of cash flowing in and out of your firm over a period. It shows your company’s ability to generate money through business operations, investments, and financing activities.

4) Efficiency metrics

Efficiency metrics measure how successfully your company uses its resources to produce money and run its operations. They allow you to see the operational effectiveness and productivity of your business.

Roman Zrazhevskiy, Founder & CEO of MIRA Safety, recommends focusing on efficiency metrics for financial reporting. “They serve as the compass that guides you to operational excellence. With these in place, you can make the necessary adjustments by streamlining your operations, boosting your productivity, and achieving long-term growth.”

Inventory turnover measures how quickly your corporation sells and replaces inventory. In short, it indicates the efficiency of your inventory management.
Accounts receivable turnover measures how efficiently your company collects money from consumers. It tracks how frequently accounts receivable are collected and replaced. Using automation solutions like Billtrust to improve accounts receivable turnover can help businesses enhance cash flow, minimize financial risk, and gain operational efficiencies, which are critical for sustained growth.
Accounts payable turnover measures how effectively your company manages its payments to suppliers and third-party vendors. It monitors how frequently accounts payable are paid and replaced.

5) Solvency metrics

Solvency metrics evaluate your company’s capacity to satisfy its long-term financial obligations. For example, they help you make informed debt-related decisions in your current situation. Hence, it shows a clear picture of your company’s economic stability and sustainability in the long run.

Sturgeon Christie, CEO of Second Skin Audio, suggests prioritizing solvency metrics for businesses with debts or loans. “They are the foundation of financial resilience, guaranteeing that your company can weather economic downturns and thrive in the long term. Maintaining a solid solvency position protects your company’s future and creates trust in all stakeholders.

Debt-to-equity ratio compares your company’s total debt to its shareholders’ equity. It reflects the amount of funding given by creditors versus shareholders, thus evaluating your company’s financial leverage.

Debt ratio compares your company’s total debts to its total assets. It indicates the proportion of assets financed with debt. Hence, it clearly shows your financial risk and leverage.
Interest coverage ratio compares your company’s earnings before interest and taxes (EBIT) to its interest expenses. It shows its capacity to fulfill its debt commitments with current operating income.

6) Market performance metrics

Market performance metrics measure how your company’s stock performs in the market. It offers information on the overall market perception of the company’s financial health and growth prospects.

Brooke Webber, Head of Marketing at Ninja Patches, believes in measuring market performance with well-defined KPIs. “Market performance metrics reflect the investor sentiment and guide your marketing and communication strategy. Understanding these KPIs enables you to articulate your company’s value proposition better and build investor trust.”

Earnings per share (EPS) calculates your company’s profitability by dividing net income by the number of outstanding shares, indicating profit per share.
Price-to-earnings ratio (P/E) compares your company’s current stock price to its earnings per share (EPS), indicating how much investors are ready to pay for every dollar of earnings.
Market capitalization is your company’s entire value in the stock market. It’s calculated by multiplying the current stock price by the total number of outstanding shares.

7) Customer-focused metrics

Customer-focused metrics evaluate your company’s effectiveness in meeting customer requirements and expectations. They give you an overview of customer satisfaction, loyalty, and overall business success.

Tony Mariotti, CEO of RubyHome, believes in prioritizing customers to increase the bottom line. “Customer-focused metrics serve as the compass that guides your commitment to providing customers with excellent service and experience. Understanding and optimizing these KPIs helps you create long-term connections and drive sustainable growth.”

Customer acquisition cost (CAC) estimates the average cost of acquiring a new client. CAC shows the effectiveness of your customer acquisition activities.
Customer lifetime value (CLV) is an assessment of a customer’s total revenue throughout their relationships. Thus, CLV can guide customer acquisition, retention, and marketing efforts.
Churn rate is the percentage of customers who discontinue product or service use. It shows discontent and requires you to improve your retention efforts.

Discover some of the best practices for financial reporting in the next section.

Best practices to implement for financial reporting

At this point, you understand what KPIs to set, track, and measure for your business. Now, it’s time to implement some practical financial strategies. That said, here are the best practices to implement for your financial reporting:

Accurate bookkeeping: Ensure financial reporting accuracy by meticulously recording all monetary transactions and activities.
Accountancy standards: Maintain financial integrity by following established accounting practices and standards.
Regular reconciliation: Identify and correct errors quickly by comparing financial records and accounts to guarantee consistency and accuracy.
Professional oversight: Improve your financial reporting process by employing qualified finance professionals such as e-commerce tax accountants and bookkeepers.
Compliance assurance: Maintain transparency and trust by adhering to finance-related laws and regulations.
Timely reporting: Establish a timely process for providing stakeholders with current and relevant financial information.
Technological integration: Increase financial reporting efficiency by leveraging and integrating advanced financial technology or FinTech solutions. The global FinTech market could grow from $294.74 billion in 2023 to $882.30 billion by 2030 at a 17% compound annual growth rate (CAGR).

Financial reporting is essential for business success

Financial reporting is a crucial part of financial management for achieving business success. Tracking, analyzing, and communicating your financial performance allows you to examine your company’s financial status and make informed decisions.

Consider the KPIs for financial reporting outlined above. Start by setting your revenue, profitability, liquidity, efficiency, solvency, market performance, and customer-focused metrics. Likewise, consistently monitor and measure the critical metrics reflected in your financial reports. More importantly, follow the best practices for financial reporting shared above.

Whether you’re a seasoned business owner or a novice entrepreneur, remember that robust financial reporting can be instrumental to your business profitability, growth, and success!