Aside from a great product, good sales, good SEO, great marketing, and so on…there’s one thing that’s critical to a startup’s long-term growth and success: good bookkeeping.

And yes… you may not be as savvy with numbers as your accountant. But understand: It is important to have knowledge of an income statement, a balance sheet and a cash flow statement.

And with it a well-founded knowledge of the most important financial figures.

And when those ratios are understood, you become a better entrepreneur, manager, company to buy, and yes…investor.

Because YOU know what to look out for in an up-and-coming company.

So here are the key financial metrics every startup should have:

** 1. Working Capital Ratio**

This ratio indicates whether a company has enough assets to cover its debts.

The ratio is current assets/current liabilities.

(Note: current assets refer to assets that can be converted into cash within one year, while current liabilities refer to debts due within one year.)

Anything below 1 indicates a negative W/C (working capital). While anything over 2 means the company is not investing excess assets; A ratio between 1.2 and 2.0 is sufficient.

So Papa Pizza, LLC has current assets of $4,615 and current liabilities of $3,003. Its current ratio would be 1.54:

($4,615/$3,003) = 1.54

** 2. Debt to equity ratio**

This is a measure of a company’s overall financial leverage. It is calculated by total liabilities/total assets.

(It can be applied to both personal and corporate financial statements)

David’s Glasses, LP has total debt of $100.00 and equity of $20,000. The ratio of debt to equity would be 5:

($100,000/$20,000) = 5

It depends on the industry, but a ratio of 0 to 1.5 would be considered good, while anything beyond that is…not so good!

Right now, David owes $5 for every $1 of equity…he needs to clean up his balance sheet fast!

** 3. Gross Margin Ratio**

This shows a company’s financial health to show earnings after cost of sales (COGS).

It is calculated as:

Revenue – COGS/Revenue = Gross Margin

Let’s take a larger company as an example this time:

DEF, LLC generated $20 million in revenue while incurring $10 million in COGS-related expenses, so the gross profit margin would be 50%:

$20 million – $10 million/ $20 million = 0.5 or 50%

That means it has 50 cents in gross profit for every dollar made… not too shabby!

**4. Net Margin Ratio**

This shows how much the company made in TOTAL profit for every $1 it makes in sales.

It is calculated as:

Net Income/Sales = Net Profit

So Mikey’s Bakery had a net profit of $97,500 on sales of $500,000, giving a net profit margin of 19.5%:

$97,500 net profit $500,000 sales = 0.195 or 19.5% net profit margin

For the record, I’ve excluded operating margin as a key financial metric. It’s a great ratio because it’s used to measure a company’s pricing strategy and operational efficiency. But just that I’ve ruled it out doesn’t mean you can’t use it as a key financial metric.

** 5. Receivables turnover rate**

An accounting metric used to quantify a company’s effectiveness in providing credit and collecting debt; Also, it is used to measure how efficiently a company uses its assets.

It is calculated as:

Sales/Receivables=Accounts receivable sales

For example, Dan’s Tires, which has about $321,000 in sales, has $5,000 in accounts receivable, so the accounts receivable turnover is 64.2:

$321,000/$5,000 = 64.2

So that means that for every $1 invested in accounts receivable, $64.20 is returned to the company in sales.

Good job Dan!!

**6. Return on Investment Ratio**

A performance indicator used to evaluate the efficiency of an investment in order to compare it to other investments.

It is calculated as:

Profit from investment costs – investment costs/investment costs = return on investment

So Hampton Media decides to shell out a new marketing program. The new program cost $20,000 but is expected to generate $70,000 in additional revenue:

$70,000-$20,000/$20,000=2.5 or 250%

So the company is targeting a 250% return on its investment. If they even come close, they will be happy campers 🙂

**7. Return on Equity**

This ratio measures how profitable a company is with the money invested by shareholders. Also known as Return on New Value (RONW).

It is calculated as:

Net Income/Equity = Return on Equity

ABC Corp shareholders want to see HOW well management is using the capital invested. So, after looking through the books for fiscal 2009, they find that on the $200,000 they invested, the company had a net income of $36,547, which is an 18% return:

$36,547/$200,000 = 0.1827 or 18.27%

They like what they see.

Your money is safe and generating a pretty solid return.

But what are your thoughts?

Are there any other key financial metrics I’ve missed?