Top Financial Indicators Every Entrepreneur Should Monitor
Most entrepreneurs in Dubai, especially SME owners, may not have a solid background in finance. However, accounting firms in Dubai recommend you have a basic understanding of the key concepts of financial accounting which will enable you to make better business decisions. Having a better understanding of how your business measures financial performance is essential to taking steps to add more value to your daily business activities.
Yet, accounting can be intimidating for newbie entrepreneurs. To help such entrepreneurs we have prepared a list of the top financial metrics entrepreneurs must understand and monitor. Read ahead to know further.
Gross Profit Margin
Gross profit margin is a critical financial metric used by analysts and stakeholders to check a company’s financial health. It is a profitability ratio used to measure the percentage of revenue left after subtracting the cost of goods sold. The cost of goods sold implies the direct cost of production excluding operating expenses, interest, or taxes. In short, gross profit margin measures the profitability of a product or item range without accounting for overheads.
Net Profit Margin
Net profit margin, another key profitability ratio, gives insights into the percentage of revenue and other income left after subtracting all costs for the business. It includes costs of goods sold, operating expenses, interest, and taxes. Net profit margin differs from gross profit margin in that the former takes into account not only the cost of goods sold but all other related expenses.
Monitoring the working capital helps you to measure your company’s available operating liquidity, which you can use to fund day-to-day operations. Working capital is calculated by subtracting current assets from current liabilities. Accounting firms in Dubai can help you monitor all the significant financial metrics.
Keeping track of the current ratio enables you to know whether your company can pay its short-term obligations—that is, obligations due within one year— with its current assets and liabilities. The current ratio is a liquidity ratio that reflects a business’ ability to generate enough cash to pay off all its debts once they become due. Current ratio = Current Assets / Current Liabilities.
The quick ratio or acid test ratio is another key liquidity ratio used to measure a company’s ability to handle short-term obligations. The quick ratio is calculated using highly liquid current assets, such as cash, marketable securities, and accounts receivables. The rationale behind this is that current assets such as the inventory are not that easy to turn into cash. The formula to compute the quick ratio is, Quick Ratio = (Current Assets – Inventory) / Current Liabilities.
You should keep track of financial leverage or the equity multiplier, which implies the use of debt to buy assets. If all your assets are financed using equity, the multiplier is one. If the debt increases the multiplier increases from one. This demonstrates the leverage effect of the debt and increases the risk of the business. Get help from accounting companies in Dubai to monitor such a key financial metric. The formula to calculate leverage is Leverage = Total Assets / Total Equity.
The debt-to-equity ratio is a solvency ratio used to understand how much a business finances itself using equity versus debt. This type of solvency ratio offers insights into the solvency of your company by reflecting the ability of shareholder equity to cover all debt in the event of a business downturn. The formula to calculate Debt-to-Equity Ratio is, Debt to Equity Ratio = Total Debt / Total Equity.
Operating Cash Flow
Monitoring the operating cash flow gives helps you to understand the volume of cash your business has as a result of its operations. The insight you gain from measuring operating cash flow can be positive, which means cash is available to grow operations. It could also be negative, implying you need additional financing to maintain your company’s current operations. You can monitor operating cash flow from the cash flow statement and it can be calculated using one of two methods: direct or indirect.
Inventory turnover is a financial ratio that helps you to understand the number of times your company has sold and replaced inventory during a specific period. The formula to calculate inventory turnover is Inventory Turnover = Cost of Sales / (Beginning Inventory + Ending Inventory / 2). Measuring inventory turnover helps you to make better decisions on pricing, manufacturing, marketing, and purchasing new inventory. You can seek the help of accounting firms in Dubai to effectively monitor inventory turnover and other key financial metrics.
Consult with the Best Accounting Firms in Dubai, UAE
Entrepreneurs must monitor the key financial metrics listed here to understand the performance of their company and how their actions affect its progress. For a better result, you can seek the help of accounting firms in Dubai such as Jitendra Chartered Accountants (JCA) who can provide valuable insights into your company’s performance. JCA is one of the top providers of accounting services in Dubai with more than 20 years of experience.
Our client base includes the leading companies in Dubai that cover SMEs, startups and MNCs. Apart from accounting services we help companies navigate critical requirements such as filing tax returns, VAT registrations and compliance requirements related to audit, Economic Substance Regulations (ESR), Ultimate Beneficial Ownership (UBO), Anti-Money Laundering and Combatting Financing of Terrorism (AML-CFT) etc.