5 financial indicators to assess your SME's health
Introduction
You know your turnover, but do you really know if your business is in good financial health? Many Swiss SME managers focus solely on sales volume, without analysing the SME indicators that reveal the reality of their situation.
A company can show growing turnover whilst lacking the liquidity to pay its suppliers. Or generate an insufficient margin to cover its fixed costs. Without a clear view of these metrics, you're flying blind.
Financial indicators aren't reserved for large companies with a dedicated CFO. A few simple ratios, tracked regularly, allow you to anticipate difficulties and make the right decisions at the right time. No finance degree required: you just need to understand what they measure and how to calculate them.
In this article, we present 5 essential indicators to assess your SME's health: gross margin, liquidity ratio, net margin rate, debt ratio and average customer payment terms. For each one, you'll discover the definition, calculation, recommended thresholds and tools to track them effectively.
📌 Summary (TL;DR)
Five indicators allow you to assess your SME's financial health: gross margin measures your ability to generate profit, liquidity ratio verifies that you can pay your bills in the short term, net margin rate reveals your real profitability, debt ratio indicates your dependence on creditors, and average customer payment terms assess your collection efficiency. Tracking these KPIs regularly helps you anticipate difficulties and manage with confidence.
📚 Table of contents
1. Gross margin: your ability to generate profit
Gross margin represents the difference between your turnover and your direct costs (purchases of goods, raw materials, subcontracting). It's the first profitability indicator to monitor.
Calculation formula: (Turnover - Direct costs) / Turnover × 100
Thresholds vary greatly by sector. Services generally show 60-80%, retail 20-40%, and manufacturing 30-50%.
Concrete example: An IT developer invoices 80,000 CHF per year with 15,000 CHF in direct costs (licences, subcontracting). Their gross margin is 81%, which is excellent for services.
To improve your gross margin: adjust your prices upwards, negotiate with your suppliers, or reduce direct costs without compromising quality.
2. Liquidity ratio: can you pay your bills?
The liquidity ratio measures your ability to meet your short-term obligations. It's a crucial SME indicator to avoid cash flow problems.
Calculation formula: Current assets (cash, customer receivables, stock) / Current liabilities (supplier debts, charges payable)
A ratio of 1.5 to 2 is recommended. Below 1, you risk being unable to pay your bills on time. Above 3, you may be underutilising your resources.
General liquidity includes all current assets, whilst immediate liquidity excludes stock for a more prudent view.
This ratio is directly linked to your cash management and the cash flow problems that can paralyse your business.
Why liquidity is crucial for Swiss SMEs
A liquidity ratio that's too low exposes your SME to major risks: inability to pay suppliers, salary delays, or default on social charges. These situations can quickly damage your reputation and relationship with your partners.
Customer payment terms are liquidity's main enemy. A customer who pays at 90 days instead of 30 days can create a critical cash flow gap.
To anticipate these problems, consult our complete guide on cash flow management for SMEs.
With BePaid, real-time payment tracking and bank reconciliation allow you to monitor your liquidity and act quickly if things drift.
3. Net margin rate: your real profitability
Unlike gross margin, net margin incorporates all your costs: fixed charges, salaries, rent, marketing, insurance, VAT. It's the most comprehensive profitability indicator.
Calculation formula: Net profit / Turnover × 100
A net margin of 5-10% is acceptable, 10-20% is excellent. Below 5%, your business model deserves review.
Example: A service SME invoices 200,000 CHF with 170,000 CHF in total charges. Its net margin is 15%, which indicates good profitability.
The factors impacting your net margin are numerous: salary increases, rent rises, marketing investments, or exceptional charges. Monthly tracking is essential.
4. Debt ratio: your level of financial dependence
The debt ratio measures your dependence on external financing. It's a key indicator for assessing your SME's financial solidity.
Calculation formula: Total debts / Equity
A ratio below 2 is acceptable for a healthy SME. Below 1 is ideal, meaning your equity exceeds your debts.
Be careful to distinguish good debt (borrowing to invest in productive equipment) from bad debt (operating debt to cover current losses).
A ratio above 3 should alert you: you're too dependent on creditors, which weakens your business in case of economic downturn or temporary difficulties.
How to reduce your debt ratio
Several strategies can improve your debt ratio. First, increase your equity by reinvesting profits rather than distributing everything.
Next, prioritise repayment of short-term debts that weigh most heavily on your cash flow and liquidity ratio.
Improve your profitability to generate more available cash. Every franc of profit reinvested strengthens your equity without creating new debt.
Finally, implement regular tracking (quarterly minimum) of your debt ratio. This allows you to detect drift before entering the debt spiral where new debts serve to repay old ones.
5. Average customer payment terms: your collection efficiency
DSO (Days Sales Outstanding) or average payment terms measures the average time between issuing an invoice and its collection. It's an essential SME indicator for cash management.
Calculation formula: (Customer receivables / Annual turnover) × 365
A DSO of 30-45 days is acceptable in Switzerland. Beyond 60 days, you have a collection problem that directly impacts your liquidity.
Example: You have 25,000 CHF in customer receivables and annual turnover of 200,000 CHF. Your DSO is 46 days, which is borderline but manageable.
The higher your DSO, the more you're financing your customers for free, to the detriment of your own cash flow.
Reduce your payment terms with the right tools
To reduce your DSO, start by defining clear payment terms from the quote: payment at 30 days net, no negotiation.
Use Swiss QR-invoices which make payment easier for your customers. The simpler it is, the faster they pay.
Implement systematic automatic reminders. With BePaid, you configure reminders at D+7, D+14 and D+30 that go out automatically. This eliminates forgetting and the awkwardness of having to chase manually.
BePaid's automatic bank reconciliation allows you to track in real time who has paid and who is late, so you can act quickly. Accounting exports also facilitate analysis of your collection indicators.
How to track these indicators effectively
Tracking frequency is crucial. Calculate your gross margin and net margin monthly, your liquidity ratio weekly (it's the most critical), and your debt ratio quarterly.
For tools, a simple Excel spreadsheet can suffice initially. But invoicing software with automatic accounting exports automates the work and reduces errors.
BePaid facilitates this tracking with detailed exports, automatic bank reconciliation, and payment statistics that directly feed your DSO and liquidity calculations.
Create alerts on critical thresholds: liquidity below 1.5, net margin below 5%, DSO above 60 days. Finally, consult an accountant regularly for in-depth analysis of these indicators.
These five financial indicators give you a clear and concrete view of your SME's health. Gross margin measures your ability to generate profit, liquidity ratio assesses your short-term solvency, net margin reveals your real profitability, debt ratio indicates your financial dependence, and average payment terms reflect your collection efficiency.
Tracking these metrics regularly allows you to anticipate difficulties, adjust your strategy and make informed decisions. But for these indicators to be relevant, you need reliable and up-to-date data.
That's where BePaid comes in. Our platform helps you track your payments in real time, reduce your collection times thanks to automatic reminders, and maintain an overview of your cash flow. Create your free account and start managing your business with accurate and current data.
