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Data science in finance brings a new era of insights and opportunities. By leveraging advanced data science, machine learning, and big data techniques, businesses can unlock the potential hidden within financial data,

Running a small business isn’t for the faint of heart. And yet, they comprise a staggering 99.9% of all businesses in the US alone. Small businesses may individually be small, but the impact they have on the economy is great—and their growth potential even greater.

But cultivating sustainable momentum in SMEs can be challenging, especially when you consider the sheer level of competition they face. Fortunately, there are many tools and strategies available to help small business owners successfully navigate this tough crowd.

Why data science in finance is essential
Why data science in finance is essential

One of the most indispensable tools you can use as a small business is key metrics. This is especially true for businesses working in technical industries, such as data science in finance and other spheres.

The ability to measure the financial health of your businesses provides you and your team with crucial information about where to allocate resources and how to structure your budgets moving forward. It can also empower you to better connect with your target audience. Let’s find out more.

5 key financial metrics every small business should follow

There are dozens of key metrics worth following. But some are more important than others, and if you’re looking for the basics, this list of critical financial metrics is a suitable place to start.

1. Gross profit margin

This is financial metric 101. All businesses, regardless of size or industry, need to track their gross profit margin. A healthy business should maintain a high profit ratio. Getting there is only possible when you have a strong grip on profit margins as they fluctuate over time.

Gross profit margin is the difference between revenue and the cost of goods or services sold, divided by revenue. It’s typically expressed as a percentage. Your gross profit margin is one of the clearest and most important indicators of your business’s health and sustainability level.

2. Cash balance

Cash flow is another vitally important financial metric to follow. Your cash balance rate is determined by deducting the cash paid from the cash received during an allocated time period, such as a month, quarter, or year. It provides useful, easy-to-analyze information about how healthy your cash flow system is. 

A low cash balance will tell you that your business may be heading towards bankruptcy, or at the very least, financial difficulty. Whereas a high cash balance indicates that your business will remain sustainable for a longer period.

3. Customer retention

While customer retention might not sound like a financial metric, it provides crucial information about the current and future revenue of your small business.

You can find your customer retention rate by subtracting the number of new customers within a set period from the total number of retained customers by the end of that same time and then multiplying that number by one hundred.

4. Revenue concentration

Another important financial metric for small businesses is revenue concentration. It helps you calculate the total amount of revenue generated by either a set of your highest-paying clients or the revenue generated by your singularly high-paying client. 

This metric is important because it gives your insight into where your revenue should be concentrated for lead generation in both present and future situations. It also helps you to understand where most of your revenue is flowing.

5. Debt ratios

Your company’s debt ratio is determined by dividing your total debt by your total assets. This key financial metric tells you how leveraged your company is—or isn’t.

Debt ratios are important for judging true equity and assets. Both of which play major roles in the overall health of your small business. A vast percentage of small businesses start off in debt after a start-up loan (or something similar), which makes debt ratios even more important to track.

Why is data science in finance essential?

In a nutshell, data science in finance is essential for informed decision-making, accurate risk assessment, enhanced financial forecasting, efficient operations, personalized services, and fraud detection. By leveraging analytics and advanced techniques, businesses can gain valuable insights, optimize processes, allocate resources effectively, deliver personalized experiences, and ensure a secure financial environment.

Why use key metrics to track the progress of your business?

While analyzing data science in finance, metrics are indicators of your business’s health and expansion rate. Without the use of metrics and data science in finance, it’s impossible to accurately understand your business’s true status or position in the market.

This is especially important for SMEs, which typically require insight to break through their respective market. But there are many benefits to using key metrics for a deeper understanding of your business, including:

Track patterns over timeIf you know how to calculate profit margin, metrics can help you to identify and follow financial patterns (and other patterns) over extended periods of time. This provides a more insightful long-term perspective.  

Identify growth opportunities – Key metrics also help you identify problems and growth opportunities for your business. Plus, they highlight trends you may not have noticed otherwise and give your insight into how to best move forward.

Helps your team focus on what’s important – When you know the hard data behind your small business, you become more informed about what problems or strategies to prioritize.

Avoid unnecessary stress – The more information you have, the less confused you will be. And the less confused you are, the more confidently you can lead your team. Finding ways to reduce financial (and other) stress in small business management is essential.

Improve internal communication – When you have access to key metrics, both you and your coworkers or employees gain clarity as a team. This enhances communication and helps streamline internal communication strategies.

These little milestone metrics allow you to see your business through a clearer lens so that you can make more informed decisions and tackle problems with more efficiency and exactitude.

Bottom line

Metrics are data feedback from your business about the state of its health, longevity, and realistic growth potential. Without them, any major business, or financial decisions you make are being made in the dark. You need data science in finance to make strategic, informed decisions about your business.

But with so many different business-related metrics, it can be hard to know which ones are most important to follow. These five are listed for their universal appeal and reliability about financial health tracking. Whether you work in data analytics or AI, these metrics will come in handy.

Without waiting any further, start practicing data-driven decision making today!

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June 15, 2023

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