12 Key Financial Metrics for Innovative SMEs

Understanding and monitoring key financial metrics is crucial for any small and medium-sized enterprise (SMEs). These metrics provide insights into a company’s financial health, help forecast future performance, guide decision-making, and drive strategic planning. For companies involved in research and development (R&D), understanding these metrics is essential to achieve valuable grants to accelerate your innovation funding.

Here’s a list of 12 essential financial metrics that we think innovative SMEs should keep a close eye on. We’re starting with 3 basic definitions, before moving on to other calculations you need to know and understand:

1. Revenue

Revenue, or sales, represents the total income generated from business activities before any expenses are deducted. Tracking revenue over time helps SMEs gauge market demand, the effectiveness of sales and marketing strategies, and overall business growth. Consistent revenue growth can signal market acceptance of innovative products or services.

Revenue = Total Sales Value

• This is straightforward, as revenue is the total income from sales of goods or services before any expenses are deducted.

2. Expenses

Expenses encompass all costs incurred in earning revenue, including operating expenses, cost of goods sold (COGS), and R&D costs. For innovative SMEs, understanding where the money is going—especially regarding investment in innovation—is critical to managing budgets and improving efficiency.

Total Expenses = Sum of all operating expenses, cost of goods sold (COGS), and other relevant expenses (such as salaries/wages, marketing costs, etc.)

• This encompasses all costs associated with earning the reported revenue.

3. Net Income

Net income, or profit, is the amount of money left after all expenses have been deducted from revenue. It’s a critical indicator of a company’s profitability and sustainability. Focusing on driving net income can help innovative SMEs reinvest in their business, attract investors, and fund new projects.

Net Income = Total Revenue – Total Expenses

• Net income is calculated by subtracting all expenses, including COGS, operating expenses, interest, taxes, and other expenses, from total revenue.

4. Operating Cash Flow

Operating cash flow indicates the cash generated from a company’s regular business operations – it is probably one of the most important metrics. It reflects the business’s ability to external financing. For innovation to generate sufficient cash to maintain and expand operations without needing SMEs, a positive operating cash flow signifies a solid foundation for investing in research and development (R&D) and other growth initiatives.

Operating Cash Flow = Net Income + Non-Cash Expenses + Changes in Working Capital

• Non-cash expenses include items like depreciation and amortisation.
• Changes in Working Capital are adjustments to current assets and liabilities.

5. Budget vs. Actual

Comparing budgeted figures with actual performance is vital for financial management. It helps SMEs identify discrepancies and understand their causes, enabling better forecasting, planning, and resource allocation.

Budget Variance Percentage = (Actual Amount / Forecasted Amount) *100

6. Gross Profit Margin Ratio

The gross profit margin ratio measures profitability calculated as gross profit divided by revenue. It shows the percentage of revenue that exceeds the cost of goods sold, indicating the efficiency of production and pricing strategies. A healthy gross profit margin is essential for innovative SMEs to fund continued innovation. Different industries have different benchmarks for an ideal gross profit margin ratio. Research your industry and measure your performance over time.

Gross Profit Margin Ratio = (Gross Profit / Revenue) * 100

• Gross Profit is calculated as Revenue – Cost of Goods Sold (COGS).

7. Acid-Test Ratio

The acid-test ratio, or quick ratio, measures a company’s ability to meet its short-term obligations with its most liquid assets. It is a critical metric for assessing the financial health and liquidity of an SME, ensuring it can navigate unexpected challenges. If you have a ratio of 1.0, you would have just enough assets to cover your liability. A higher number is preferred so that you have financial flexibility.

Acid-Test Ratio = (Current Assets – Inventory) / Current Liabilities

• Current assets are assets that can be reasonably converted into cash within a year.
• Inventory is the value of materials and goods held by a company with the intention of selling them to customers.

8. Average Customer Acquisition Cost

This metric calculates the average cost involved in acquiring a new customer. It’s crucial to evaluate the efficiency of marketing strategies and ensure that the cost of expanding the customer base is sustainable for the business. Additionally, considering the lifetime value of a customer allows you to evaluate whether you average CAC is too high specific to your business model.

Average CAC = Total Marketing and Sales Expenses / Number of New Customers Acquired

• This calculates the average cost to acquire a new customer, considering all related marketing and sales expenses.

9. Churn Rate

The churn rate indicates the percentage of customers who stop doing business with a company over a specific period. For SMEs offering innovative products or services, a low churn rate indicates customer satisfaction and product or service viability.

Churn Rate = (Number of Customers Lost During a Period / Number of Customers at the Start of the Period) * 100

• This percentage reflects the rate at which customers stop doing business with the company.

10. Accounts Receivable Turnover Ratio

This ratio measures how efficiently a company collects revenue from its customers. A high accounts receivable turnover ratio implies efficient collection processes, vital for maintaining cash flow and funding ongoing innovation efforts.

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

• This measures how often a company can turn its accounts receivable into cash within a period.

11. Current Accounts Payable

This metric represents the total amount of short-term obligations or debts the company needs to pay within the following year. Managing accounts payable efficiently ensures the company maintains good supplier relationships and sufficient liquidity.

This is more of an account balance than a formula. Current Accounts Payable is the total amount of short-term obligations or bills the company must pay within the following year.

12. Cash Runway/Burn Rate

Understanding the cash runway and burn rate is essential for startups and growth-focused SMEs. This metric indicates how long the company can continue operating at its current burn rate before securing additional funding. It is quite simply a comparison between how much money you have against how much you’re spending per month – your burn rate. For innovative businesses, a longer cash runway provides more time to develop, test, and refine new products or services.

Cash Runway = Current Cash Balance / Monthly Burn Rate

Monthly Burn Rate = (Cash balance at the start of the period – Cash balance at the end of the period) / Number of months within the period

We’re Here to Support Innovative SMEs

For innovative SMEs, understanding and effectively managing these 12 key financial metrics is not just about internal financial health but also securing external funding and supporting sustainable growth. By demonstrating strong performance and prudent financial management across these metrics, SMEs can enhance their appeal to a wide range of investors and lenders, opening up new avenues for innovation funding and strategic partnerships.

Contact us today to explore your innovation funding options and seek financial advice.