Warren Buffett is known for his long-term thinking and careful evaluation of business fundamentals. Though small business owners don’t run publicly traded companies, many of the same metrics that Buffett relies on can offer meaningful insight into how your business is performing.
One of Buffett’s favorite indicators is Return on Equity (ROE)—a measure of how efficiently a company is generating profit from the capital invested in it. In simple terms, ROE helps answer the question: For every dollar invested in this business, how much profit is it producing? ROE can signal whether your capital is working hard or underperforming.
Operating margin is another important metric. It shows how much profit is left after covering your core operating costs. For example, if a business brings in $1 million in revenue and $200,000 of that is operating profit, it’s running at a 20% margin. Higher margins often reflect better pricing strategies, efficient operations, or both.
But perhaps Buffett’s favorite metric of all is free cash flow. While profitability is important, free cash flow tells you how much real cash the business is generating after expenses and capital spending. That’s the cash available to reinvest, distribute, or build up reserves—making it one of the most telling signs of a business’s financial health.
Consider a hypothetical business – a $5 million construction firm with a healthy 13% operating margin and minimal debt. On paper, it looks like a model company. But if it lacks a consistent plan for where to deploy its profits, or has unpredictable swings in receivables and payables, it may still struggle to grow sustainably. This is where a structured approach – such as building a rolling forecast or tracking key metrics over time – can help translate strong performance into long-term success.
Likewise, a retailer with growing top-line revenue, currently at $1.5 million, but persistently thin margins and cash flow might be making sales, but without clear insight into its unit economics, it’s hard to know whether that growth is actually profitable. These are the kinds of financial blind spots that often go unnoticed when owners rely solely on year-end statements or gut instincts.
Using metrics like these and other key performance indicators (KPIs) and by using tools like a rolling cash-flow forecast and a multi-year financial statement projection allows for smarter planning. The numbers are telling a story, and when you understand the story, you can consistently make better decisions.
Buffett’s metrics aren’t just for billionaires. If you have questions about how to use these measures and other tools in your business, contact us at help@sbsaccountants.com or 770-745-4283.