Are you just starting out as a business owner? Or a seasoned entrepreneur who wants to take your company to the next level of growth? Either way, tracking financial ratios can help you analyze your company’s financial position. When problems come up, you face them head-on to push your business forward. Whether you go an inch or a mile, you record all your financial moves in your small business online accounting records.
If you simply write down your transactions, you could miss key information about your financial fitness. You need financial ratios to measure your momentum.
The following list examines 6 of the key ratios for a small business.
1. Net Profit Ratio
Net Profit Ratio = Net Income / Net Sales
This profitability ratio measures if a business’s activities are profitable. A net profit ratio of 10% means that for every dollar of sales a business generates, 10$ was created for the owner.
2. Quick Ratio
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
This liquidity ratio measures a business’s ability to generate cash. Its ability to cover its short-term debts. A quick ratio greater than 1.0 generally means the business is doing well.
3. Current Ratio
Current Ratio = Current Assets / Current Liabilities
Your current ratio, also known as your working capital ratio, estimates your ability to pay short-term obligations, liabilities, and debts due within one year. Ideally, your current ratio will be greater than one, meaning you can settle every dollar owed for payables, accrued expenses, and short-term debts with your existing current assets.
4. Inventory Turnover Ratio
Inventory Turnover Ratio = Cost of Goods Sold / Inventory
This efficiency ratio shows how quickly a business is selling its inventory. A higher ratio indicates that sales are good and that the business is effectively managing its inventory by having less of its assets tied up in inventory.
5. Debt to Equity Ratio
Debt to Equity Ratio = Total Liabilities / Shareholders Equity
This solvency ratio measures the amount of debt a business uses to finance its assets. In other words, it shows if the company uses debt or equity financing. The larger the ratio, the more debt is being used instead of the business equity.
6. Return on Assets Ratio
Return on Assets Ratio = Net Income / Total Assets
This profitability ratio is used to determine how effectively a business is using its assets to generate profits. The greater the ratio, the better a business is using its assets to make money.
Reach Out for Help
Everyone deserves a supportive team of people who care. If you feel overwhelmed with year-end bookkeeping, reach out to an online bookkeeping service. Cloud Bookkeeping Inc’s team provides monthly bookkeeping and accurate financial reports. We’ll give you financial visibility throughout the year and deliver insights to make strategic business decisions.
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