# Key business health metrics explained in plain words

> Business health metrics are a handful of ratios that assess profitability, safety margin and solvency: net margin, liquidity, runway in months, break-even point, working capital and debt load. They are calculated from the cash flow statement, the profit and loss report and the balance sheet, and what counts as healthy depends on the industry.

Six numbers that show in half an hour a month whether your business stands firm, how to calculate them and when to worry.

## Why do business health metrics matter?

The balance on a bank account says little. A business with a million in the bank can be on the edge if two million is due tomorrow, while a business with an empty account can be healthy if customers pay upfront. Metrics turn raw amounts into ratios you can compare with earlier months and with each other.

The ranges below are **rules of thumb**: retail, services, manufacturing and a seasonal hotel all have different norms. Use them as a starting point and set your own thresholds from your business history.

## Six metrics: how to calculate them and what to expect

The ranges are not standards and depend strongly on industry and seasonality.

| Metric | How to calculate | Rule of thumb |
| --- | --- | --- |
| Net margin | Net profit ÷ revenue × 100% | Below 0 is a loss; up to 5% is a thin cushion; 10–15% or more is comfortable for many services, while retail often lives with less |
| Liquidity (cash coverage) | Cash on accounts ÷ unpaid liabilities | 1 or more: all current bills can be paid from cash; below 1 depends on future receipts |
| Runway | Cash ÷ average monthly net burn (costs minus receipts) | Under 3 months is alarming; 6 months or more is comfortable; seasonal businesses should count to the end of the off-season |
| Break-even point | Fixed costs ÷ (1 − variable costs ÷ revenue) | The lower it is relative to current revenue, the bigger the safety margin |
| Working capital | Cash + receivables + inventory − short-term liabilities | Positive; current assets are usually kept above current liabilities, often at 1.5x or more |
| Debt load (debt to equity) | Liabilities ÷ equity (assets − liabilities) | Below 1 is calm; above 2 is risky, especially with unstable income |

## What does it look like with numbers?

Take an imaginary small business (illustrative amounts, monthly, in euros). Revenue is 100,000, variable costs (materials, commissions) are 45,000 and fixed costs (rent, salaries, services) are 40,000. Net profit is 100,000 − 45,000 − 40,000 = 15,000.

- **Net margin:** 15,000 ÷ 100,000 = 15%.
- **Break-even point:** contribution margin ratio = 1 − 45,000 ÷ 100,000 = 0.55; 40,000 ÷ 0.55 ≈ 72,700 of monthly revenue. Safety margin: (100,000 − 72,700) ÷ 100,000 ≈ 27%.
- Cash is 180,000, receivables 90,000, inventory 60,000, unpaid supplier bills 120,000 and other short-term liabilities (salaries, taxes) 30,000.
- **Liquidity:** 180,000 ÷ 120,000 = 1.5.
- **Working capital:** (180,000 + 90,000 + 60,000) − (120,000 + 30,000) = 180,000.
- **Debt load:** equity = 330,000 − 150,000 = 180,000, so 150,000 ÷ 180,000 ≈ 0.83.

Today the business is profitable, so there is no net burn and runway is unlimited. Now stress it: revenue drops to 60,000 while costs stay at 85,000. Net burn is 25,000 a month and runway is 180,000 ÷ 25,000 = 7.2 months. That is why runway is useful: it turns the amount in the bank into the time you have to react.

## Why should metrics never be read in isolation?

A high margin next to liquidity of 0.3 means profit on paper and a cash problem: customers are paying late. Good liquidity with a negative margin means you are eating into savings. A pile of cash against a huge debt looks safe only as long as the lender is willing to wait.

It helps to keep three reports apart: the [cash flow statement, profit and loss and balance sheet](https://findir.rozum.one/en/guides/cash-flow-vs-profit-vs-balance/) answer different questions, and health metrics combine them. When liquidity falls, look at the payment calendar — [it shows the exact days of cash gaps](https://findir.rozum.one/en/features/payment-calendar/).

## A 15-minute monthly review

- Reconcile account balances with bank statements.
- Calculate the month’s net margin and compare it with the previous three.
- Refresh runway using the current average burn.
- Review overdue receivables and payments due in the next 30 days.
- Compare revenue with the break-even point and estimate the safety margin.
- Write down your own thresholds for your industry and season, and revisit them yearly.
- Decide on one action to take if any metric moves into the red zone.

## Terms

- **Revenue** — Money, or claims to money, for goods and services sold in a period, before costs are deducted.
- **Receivables** — The amount customers owe you for goods or services already delivered.
- **Payables** — The amount you owe: supplier bills, salaries and taxes not yet paid.
- **Fixed and variable costs** — Fixed costs do not move with sales in the short term (rent); variable costs grow with them (materials, commissions).
- **Net burn** — How much cash the business loses per month when costs exceed receipts.

## How this is built into Financist

On the Financist dashboard, [Business Health](https://findir.rozum.one/en/features/business-health/) gives a combined score from 0 to 100 built from five metrics: net margin (weight 30), runway (25), liquidity (20), debt load (15) and revenue growth against the previous period (10). It is calculated over a period of at least three months, and each metric comes with an explanation and advice. By default the maximum margin score starts at 17% and the maximum runway score at three months; scales and weights can be configured.

Note that while the transaction history is shorter than three months the score is not produced. Break-even and working capital are not separate dashboard metrics — they are easy to calculate from the profit and loss report and the balance sheet.

## See Business Health on demo data

**See Business Health on demo data** The demo creates a workspace with sample transactions where the metrics are already calculated. [Try the demo](https://findir.rozum.one/app/)

## Frequently asked questions

### Which business health metrics matter most for a small business?

Runway in months and net margin come first: the former shows how much time you have to react, the latter whether the business earns anything at all. Liquidity, break-even and debt load follow. Together they give a fuller picture than any single number.

### What is runway and how is it calculated?

Runway is the number of months a business can last on its current cash at the current net burn. The formula is cash ÷ average monthly burn, where burn is costs minus receipts. If the business is profitable there is no burn and runway is unlimited.

### What net margin counts as good?

There is no universal figure. Below zero is a loss, a few percent is a very thin cushion, and 10–15% or more is often comfortable for services. High-volume retail can live with much lower percentages. Compare yourself with your own history and your industry.

### How does liquidity differ from working capital?

Liquidity (cash coverage) compares only cash with unpaid liabilities. Working capital adds receivables and inventory and subtracts all short-term liabilities, so it shows whether current assets can cover current debts even if part of them still has to be turned into cash.

### Does Business Health replace advice from a financial professional?

No. It is a summary score based on typical scales that quickly highlights weak spots. Thresholds depend on industry and seasonality, so decisions should consider your business context, and the Business Health scales can be adjusted to fit.

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Source: https://findir.rozum.one/en/guides/business-health-metrics/