When you’re running a business, it’s easy to get caught up in the day-to-day activity and lose sight of the big picture. Taking stock of the health of your business is important. Knowing where you allow for more effective planning, early warning about any issues, and the chance to better chart a course for success.
Attending one of our 7 ways to grow your business seminars is a great start to work out how you can grow the value of your business. Not all aspects are the same when it comes to a business, not everyone wants the most sales, a lot of people want their business to cover their needs to live a life worth living. Saving time is another outcome from the 7 ways seminar so that you can free yourself from your business and live that life.
Financial ratios help make sense of your accounting information and can help you make better decisions. Ratios show you what aspects of your business are efficient (and what’s not working) by comparing figures. Ratios can help you compare your present conditions to past performance. By looking at trends in your strengths and shortcomings, you can improve business operations.
Financial ratios can also compare you to other companies in your industry, so you can see how you stack up against your competitors. This can help ensure your business is ready for a loan as lenders look at ratios when you apply for a loan.
There are some quick ratios that will help you in order 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. The below can be quiet helpful and can even form a part of your ongoing checks and KPI dashboard, if you want to know more or help with this, just ask.
Liquidity ratios are about how quickly you can turn your business assets into cash – which helps you assess whether you’ll be able to pay the bills.
High ratios are better, as this means you’ve got more assets than liabilities.
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 = (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 look at sources other than cash flow to see whether your business will be able to settle debts.
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 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.
Checking in on your business health is a great habit to get into. Using these ratios helps you to understand your current business health and allows you to plan. Talk to us about how to calculate the factors in these ratios in order to keep your business on the right track.