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’re allows for more effective planning, early warning about any issues, and the chance to better chart a course for success.
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.
Liquidity Ratios
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
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
Total liabilities / Total assets – This tells you what percentage of assets is being financed by liabilities.
Profitability Ratios
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 profit / Total sales – This ratio tells you whether you can cover the necessary business overheads from your sales.
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.
A Business Health Check with Saige
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.
