3 Numbers Every Small Business Owner Should Know to Understand Your Financial Health

What Numbers Should Every Small Business Owner Know?

Every small business owner should understand at least three numbers: cash runway, gross profit margin, and net operating cash flow.

1. Cash runway tells you how long your business could continue paying its expenses with the cash currently available.

2. Gross profit margin helps you understand whether your products or services are priced appropriately relative to their direct costs.

3. Net operating cash flow shows whether your normal business operations are actually generating cash.

These three numbers don’t replace complete financial statements, bookkeeping or professional advice. But together, they can give a business owner a practical snapshot of whether the business can pay its bills, whether its pricing and costs are sustainable, and whether its core operations are producing cash.

You don’t need to become your own accountant. But as a business owner, you should know enough about your numbers to recognize when something needs your attention.

You started a business because you’re good at something.

Maybe you’re a consultant, coach, attorney, designer, photographer or financial professional. Maybe you sell a product. Maybe you’ve turned a side hustle into something that’s finally starting to feel like a real company.

Then at some point you realize that along with becoming the CEO, salesperson, marketer and customer service department, you’re apparently supposed to understand the numbers too.

That’s where many business owners freeze.

You open a financial report and see revenue, gross profit, net income, accounts receivable, cash flow, assets, liabilities and percentages you haven’t thought about since high school math.

So you close it.

But understanding your business finances doesn’t require becoming a CPA.

In this Purse Strings Money Talks, Laura Ann Strobel, CPA, shared three numbers she believes can give small business owners a useful snapshot of what’s happening financially: cash runway, gross profit margin and net operating cash flow. Her goal wasn’t to give business owners an accounting degree in 30 minutes. It was to help them gain enough confidence to understand what their numbers are telling them.

Let’s break those numbers down without making this harder than it needs to be.

1. Cash Runway: How Long Can Your Business Keep Paying Its Bills?

The first question is incredibly practical:

If no more money came into the business for a while, how long could you continue paying your bills?

That’s your cash runway.

A simple way to estimate it is:

Cash on hand ÷ Average monthly business expenses = Cash runway in months

For example, if your business has $40,000 available and your average monthly expenses are $10,000, you have approximately four months of runway.

That number gives you context that looking at your bank balance alone doesn’t.

Having $40,000 in a business account might feel like a lot of cash. But if it costs $35,000 every month to operate the business, you’re in a very different position from a business that spends $5,000 a month.

Laura explained that your appropriate runway depends on your industry, business model, seasonality and risk tolerance. Her own accounting business experiences revenue fluctuations throughout the year, for example, so its cash needs don’t necessarily look like those of a business with consistent monthly revenue.

That’s why there isn’t one magic number every business should keep in the bank.

How Much Cash Should a Small Business Keep on Hand?

Start by understanding your average monthly operating expenses and then learn what’s typical in your industry.

Talk to other business owners, industry groups and your accountant or financial professional. You don’t need another business owner to tell you exactly how much revenue she makes to learn something useful. She may be perfectly comfortable sharing that her company typically maintains four months of operating expenses or that six months is more appropriate because her business is highly seasonal.

Laura also distinguishes between operating runway and an additional emergency reserve. Your operating runway is cash available to keep paying employees, vendors, rent, software and other regular expenses if revenue slows. A deeper reserve can provide another layer of protection against a larger disruption.

The important thing is knowing what your business has instead of assuming the balance in the bank is “plenty.”

2. Gross Profit Margin: Are You Pricing Your Work Correctly?

Revenue gets a lot of attention.

“We made $500,000 this year!” sounds fantastic.

But how much did it cost you to produce the products or services that generated that $500,000?

That’s where gross profit margin becomes useful.

Laura shared this basic formula:

(Revenue − Direct Costs) ÷ Revenue × 100 = Gross Profit Margin

Your gross profit margin shows how much of your revenue remains after the direct costs associated with producing your product or delivering your service. That remaining money still has to cover overhead and ultimately produce profit.

Suppose you generate $100,000 in revenue and incur $40,000 in direct costs.

Your gross profit is $60,000, which means your gross profit margin is 60%.

That percentage becomes more useful when you track it over time or compare it with appropriate benchmarks for your industry.

A Low Margin Doesn’t Automatically Mean “Raise Your Prices”

Pricing is certainly one lever.

If it costs you $90 to produce something you sell for $100, you probably need to examine whether that price makes sense.

But price isn’t the only side of the equation.

Laura encourages business owners to look at the costs underneath the product or service too. Have your materials become more expensive? Is there another vendor? Are you paying for software you no longer need? Have costs increased over the years while your pricing stayed exactly the same?

Sometimes the answer is raising prices.

Sometimes it’s reducing the cost of delivering the work.

Sometimes it’s both.

And again, there is no universal “good” gross profit margin. A professional service firm, restaurant, retail store and manufacturing company have completely different cost structures. Compare your numbers with relevant businesses in your industry rather than chasing a generic percentage from the internet.

3. Net Operating Cash Flow: Is Your Business Actually Producing Cash?

Here’s where business finances can get sneaky.

Your accounting system can say you’ve earned money that hasn’t actually arrived in your bank account yet.

If you invoice a client for $10,000, your financial reports may recognize that sale before the client has paid you. That’s useful accounting information, but unfortunately you cannot use an unpaid invoice to make payroll.

That’s why Laura’s third number is net operating cash flow.

For a small business owner, the basic question is:

Is the normal operation of this business generating enough actual cash to keep it going?

You want to pay attention not only to what you’ve sold but also to when the money arrives and when your bills have to be paid. If customers routinely take 60 days to pay while your major expenses are due every 30 days, you can have a profitable business on paper and still experience a serious cash squeeze.

Not All Cash Coming Into Your Business Is Revenue

This distinction is especially important for newer businesses.

Maybe you transferred $20,000 of personal savings into the business.

Or you received a business loan.

Your bank balance increased, but your normal business operations didn’t generate that money.

Laura used her own newer business as an example. Personal money invested by the owners provided cash to the company, but it wasn’t operating revenue generated by the business itself.

Separating those sources helps you answer a much more important question:

Is this business beginning to support itself, or am I continuing to support the business?

For a startup, needing owner investment isn’t necessarily a sign that something has gone wrong. But you still need to know which is which.

Revenue Is Not the Same as Profit, and Profit Is Not the Same as Cash

This distinction is worth understanding because these words are often used interchangeably when they shouldn’t be.

Revenue is the money your business earns from selling its products or services.

Profit is what’s left after subtracting applicable business expenses.

Cash flow tracks the actual movement of money into and out of the business.

A business can have strong revenue but weak profit because its costs are too high. It can also show a profit on its financial statements while struggling to pay today’s bills because customers haven’t paid their invoices yet.

That’s why looking at only one number can give you an incomplete picture.

You don’t need to memorize an entire financial statement. But you should understand enough to ask, Are we selling enough? Are we keeping enough? And is the cash actually showing up when we need it?

You Don’t Need Fancy Bookkeeping Software to Start

This was one of the most useful parts of Laura’s conversation for very small or newer business owners.

You do not necessarily need a complicated accounting system on day one.

Laura said a small business can begin with something as simple as a monthly revenue and expense log in Excel or Google Sheets. If spreadsheets are a barrier, some financial institutions allow users to add descriptions or categories directly to transactions, which can help create a record of what the money was actually for.

The important thing is to create a system you’ll actually maintain.

Track money coming in. Track money going out. Record what transactions were for. Keep business and personal activity organized. As the company becomes more complicated, your bookkeeping system can become more sophisticated too.

The worst system is the one you avoid for 11 months and then try to reconstruct during tax season.

The Five-Minute Money Habit Every Business Owner Can Start

Laura recommends reviewing your transactions at least once a week.

Not once a quarter.

Not the night before your tax appointment.

Once a week.

Pick a relatively quiet day and spend a few minutes reviewing what came into and left the business. Make sure transactions are categorized and described while you still remember what they were.

And be specific.

“Amazon” isn’t an expense category.

Was it office supplies? Equipment? Materials for a client project?

Laura recommends starting with just five minutes a week, noting that this small bookkeeping habit can save considerable time later because you’re recording transactions while they’re still fresh in your mind.

Five minutes isn’t going to turn you into a CPA.

That’s not the goal.

It makes you a business owner who knows what’s happening in her own business.

When Should You Bring in a Bookkeeper or CPA?

Being financially informed doesn’t mean doing everything yourself.

As your business grows, a bookkeeper, CPA, tax professional or other financial professional may help with bookkeeping, payroll, sales tax, tax compliance, estimated payments, tax planning and other financial responsibilities.

Laura explained that her work includes both tax compliance and proactive tax planning, along with bookkeeping, payroll and customized estimated tax payments for business owners. She also noted that many clients benefit from meeting more than once a year rather than waiting until tax season to discuss everything that happened during the previous 12 months.

That’s an important distinction.

Your financial professional can help you understand the numbers. You still need to know enough about your business to participate in the conversation.

You shouldn’t need to calculate every ratio in your head.

But if someone asks, “How much does it cost to run your business every month?” or “Is your business generating positive cash?” you should have a reasonable idea of the answer.

Frequently Asked Questions About Small Business Financial Numbers

What financial numbers should every small business owner know?

A useful starting point is knowing your cash runway, gross profit margin and net operating cash flow. Cash runway tells you how long your business could continue operating with the cash currently available. Gross profit margin shows how much revenue remains after the direct costs of delivering your product or service. Operating cash flow helps you understand whether the company’s normal operations are actually generating cash.

Those three metrics don’t tell you everything about a business, and different businesses may need additional metrics. However, they answer three fundamental questions: Can I pay my bills? Is my product or service priced sustainably relative to its costs? And is the business itself producing cash?

What is cash runway in a small business?

Cash runway estimates how long a business can continue covering its operating expenses using the cash currently available if no additional cash comes in. A simple calculation is cash on hand divided by average monthly operating expenses.

For example, a company with $60,000 available and $15,000 in average monthly expenses has roughly four months of runway. The appropriate runway varies considerably depending on the business. Seasonality, payroll obligations, fixed costs, access to financing and the predictability of revenue can all affect how much cash a business owner wants available. Rather than relying on a universal benchmark, compare your needs with similar businesses and discuss an appropriate cushion with your financial professionals.

What is a good gross profit margin for a small business?

There isn’t one gross profit margin that is “good” for every small business. Appropriate margins vary significantly by industry and business model because companies have very different direct costs.

A service business with relatively few direct costs might operate with a much higher gross margin than a company that manufactures or resells physical products. Instead of comparing your company with a generic percentage, track your margin over time and compare it with relevant businesses in your industry. If your margin is declining, investigate both sides of the equation: what you’re charging and what it costs you to deliver the product or service.

How do you calculate gross profit margin?

Gross profit margin is calculated by subtracting direct costs from revenue, dividing the result by revenue and multiplying by 100 to express it as a percentage.

For example, if a business generates $200,000 in revenue and has $80,000 of direct costs, its gross profit is $120,000. Dividing $120,000 by $200,000 gives a gross profit margin of 60%.

The calculation becomes useful when you track it consistently. If revenue is increasing but your gross profit margin is shrinking, your costs may be increasing faster than your prices, which is something worth investigating.

What is the difference between profit and cash flow?

Profit measures what remains after revenue is reduced by applicable expenses under the accounting method used by the business. Cash flow tracks actual money moving into and out of the company.

The distinction matters because a business can be profitable on paper but short on cash. For example, you may have invoiced customers for work you’ve completed and recognize that revenue in your accounting system even though the customers haven’t paid yet. Meanwhile, payroll, rent and vendors still require actual cash. Monitoring cash flow helps you understand whether money is arriving in time to meet the company’s obligations.

How much cash should a small business keep in the bank?

There is no universal amount because the appropriate cash reserve depends on monthly expenses, revenue predictability, seasonality, payroll, business model and the owner’s risk tolerance.

A better approach is to calculate your current cash runway in months and determine what is reasonable for your specific business. Laura discussed maintaining several months of operating runway in her own accounting business, while emphasizing that different industries may require different cushions. Talk with business owners in your industry and your financial professionals about what would allow your company to continue operating through a temporary decline in revenue or unexpected expense.

Do I need QuickBooks or accounting software when I start a business?

Not necessarily. A very small or new business may be able to begin with a consistent spreadsheet or transaction log that records revenue and expenses. Laura specifically recommends using a digital system when possible because it can make organizing and reviewing information easier.

As the business becomes more complicated, accounting software may become increasingly useful for invoicing, reporting, payroll, accounts receivable and other functions. The important thing at the beginning is not owning a particular software subscription. It’s creating a reliable system for knowing what money came in, what went out and what each transaction represented.

How often should a small business owner review her finances?

A short weekly review is a useful starting habit. Look at your bank and credit card activity, categorize transactions, check incoming payments and note anything unusual while the activity is still fresh in your mind.

Then conduct deeper monthly or quarterly reviews depending on the complexity of the business. Laura recommends starting with approximately five minutes each week simply to stay organized. The purpose isn’t to perform a complete financial analysis every Friday. It’s to prevent months of transactions from accumulating without anyone paying attention to them.

What should I track for my small business?

At a minimum, track business revenue and business expenses and keep enough information to understand what each transaction represents. Depending on your business, you may also need to track invoices, accounts receivable, payroll, sales taxes, vehicle mileage, inventory or other business-specific information.

Laura’s rule of thumb is that it’s generally better to track more business-related information than to discover later that you didn’t keep enough documentation. A CPA or bookkeeper can help you determine what records are appropriate for your particular business and tax situation.

What’s the difference between a bookkeeper and a CPA?

A bookkeeper generally focuses on recording and organizing financial transactions so the business’s books accurately reflect what’s happening. A CPA may provide accounting, tax compliance, tax planning and other financial services depending on the professional’s practice and qualifications.

There can be significant overlap, and not every bookkeeper or CPA provides the same services. Laura’s practice, for example, offers bookkeeping alongside payroll, tax compliance, estimated-tax planning and tax planning. When hiring someone, ask specifically what they will handle, how often you’ll meet, what reports they’ll provide and what you’re still responsible for doing yourself.

The 3-Number Business Check-In

You don’t need to stare at your books every morning.

But once a month, you should be able to sit down and answer:

1. How many months of operating expenses do we currently have available?

2. What is happening to our gross profit margin?

3. Are our normal business operations generating positive cash?

If one of those answers doesn’t look right, that’s your cue to investigate.

Maybe clients aren’t paying quickly enough. Maybe your software costs quietly doubled. Maybe your prices haven’t changed in five years. Maybe revenue looks fantastic but you’re continuing to fund the business personally.

The number isn’t there to scare you.

It’s there to tell you where to look.

You Don’t Need to Know Every Number. Know the Ones That Matter.

Owning a business doesn’t mean you need to become your own accountant.

It does mean you shouldn’t be completely disconnected from your numbers.

Start with three.

Know how long your cash can keep the business running. Understand whether enough money remains after delivering your product or service. And know whether the business itself is actually generating cash.

Then build from there.

If the numbers raise questions you don’t know how to answer, that’s when the right professional becomes especially valuable.

Connect with Laura Ann Strobel, CPA, or explore the Purse Strings Approved Professional Directory to find a vetted professional who can help you understand what’s happening in your business and make more informed financial decisions.

You don’t need an accounting degree. You need enough clarity to know what questions to ask.