General Financial Indicators (Part 2)
Hello again! Now is the time to talk about two more financial indicators — and then we'll connect everything to revenue metrics and KPIs.
4. Debt Ratio
Debt Ratio (also known as the debt-to-equity ratio) assesses a company's financial risk by comparing its total debt to its shareholders' (or owners') equity. It helps entrepreneurs understand how much financial risk they're carrying.
Formula: Total Debt ÷ Shareholders' Equity
Example: A company has $200,000 in total debt and $300,000 in shareholders' equity.
$200,000 ÷ $300,000 = 0.67
This indicates the company has $0.67 in debt for every $1 of equity. The lower this ratio, the better — a lower ratio means less financial risk.
5. Burn Rate
Burn Rate measures how fast a business consumes its available cash. Monitoring it is critical, especially for startups, as it helps estimate the runway — the time until the business runs out of cash without additional funding.
Formula: Beginning Cash − Ending Cash = Monthly Burn
Example: A startup begins the month with $100,000 in cash and ends the month with $90,000.
Burn Rate = $100,000 − $90,000 = $10,000/month
This means the startup is using $10,000 of cash each month, giving it a 10-month runway before running out of cash without additional funding.
Monitoring Revenue Metrics
Now let's connect these indicators to revenue metrics — tools that help us understand how effectively we're generating income.
Revenue metrics provide insights into how your project makes money and whether your revenue generation is on track.
Metrics, Finance, and KPIs
While financial metrics focus on evaluating the financial health of a venture, KPIs cover a broader range of performance indicators, including non-financial aspects.
| Project Type | Example KPI | |---|---| | Non-profit (social impact) | Number of beneficiaries served | | For-profit (e-commerce) | Customer satisfaction score |
Both types matter — choose the KPIs that fit your project's mission.