It is an undeniable fact that knowledge equates to power. This rings especially true when it comes to comprehending your business's financial standing.
Running a business can lead to getting too focused on daily tasks and losing sight of the overall goals. Assessing the status of your business is crucial as it enables better planning, early detection of potential problems, and the opportunity to strategize for success more effectively.
There are some quick ratios that will help you to gauge the health of your business. We can help you to assess your business health and show you how to calculate these vital checks.
Liquidity Ratios
Liquidity ratios measure the speed at which your business assets can be converted into cash, allowing you to evaluate your ability to meet financial obligations in case of cashflow constraints.
High ratios are better, as this means you’ve got more assets than liabilities.
Current ratio
Current ratio = Total current assets / Total current liabilities
As a general guideline, 2:1 is a good current ratio, but this does depend on the kind of industry you’re in, and the nature of the assets and liabilities.
Quick ratio
Quick ratio = (Current assets – stock on hand) / Current liabilities
This measure excludes your existing stock, which you may not be able to quickly turn into cash, and is seen as a more realistic quick snapshot of your position.
Solvency ratios
One crucial element for any business! Solvency ratios examine alternative sources, beyond cash flow, to determine if your business can meet its financial obligations.
Leverage ratio
Leverage ratio = Total liabilities / Equity
This is a measure of whether your business is reliant on debt financing or equity to fund your assets. A higher ratio can make it harder to borrow money.
Debt to assets
Debt to assets = Total liabilities / Total assets
This tells you what percentage of assets is being financed by liabilities.
Profitability ratios
We all aim to generate profits in our business, as without them, we cannot sustain our operations. Knowing your profitability can indicate whether you are facing a critical situation.
Profitability ratios will let you know how efficient your business operations are. Where possible, it’s good to measure your business against others in your industry.
Gross margin ratio
Gross margin ratio = Gross profit / Total sales
This ratio tells you whether you can cover the necessary business overheads from your sales.
Net margin ratio
Net margin ratio = Net profit / Total sales
This measure tells you the percentage of sales dollars left after you’ve settled your expenses, except for your income taxes.
Why It Matters
By looking at various ratios and financial indicators, you can get a good grasp of how your business is doing financially. It's like getting a pulse on your company's performance and stability. Calculating these ratios involves a bit of number crunching but it's totally worth it. You can see how profitable your business is, how well it can handle short-term financial needs, and more.
Understanding the Results
Once you have these numbers, it's like having a secret code to decipher your business's financial well-being. You can spot areas that need a bit of TLC and make smart decisions to keep things on the up and up. So, keep an eye on those ratios, stay in the know about your business health, and you'll be steering your ship towards long-term success in no time!
If you need help understanding your business ratios, feel free to reach out to us. We're here to help you keep your business on the right track.
Comments