Financials Ratios Business Owners Should know
Small businesses need to be very careful about their actions, especially in the beginning, and should take a look at their critical financial numbers regularly to keep track of their performance. Numbers that you need to track closely can be found easily on different reports like Cash Flow Statement, Balance Sheet and the Income Statement. But before you look into these, you should know what ratios you should be tracking closely. Here are the top 4 of them.
- Gross margin
Also known as gross profit, gross margin represents the value after deducting direct costs from your income. It is the amount that you’re left with for covering your overhead costs or indirect costs. Direct costs mean those costs that you have to bear in selling your services and products. They include the cost of manufacturing or purchase, freight, duties, customs, interest paid, losses, local delivery, etc. Deduct all o them from your income and keep an eye on your gross margin.
Every single business out there tracks its sales. Sales-to-revenues ratio is probably one of most significant figures that you need to keep an eye on. However, mistake made by most of the executives is that they do a comparison of most recent numbers with those of past. You can really do a lot better if you do a comparison of current numbers with what you want to achieve in future.
- Quick ratio
For calculating this ratio, you have to add accounts receivables and cash at hand while the result should be divided by your current liabilities or accounts payables. This number is considered really important for staying on top as it lets you know exactly how much you have in cash for dealing with all the bills. At bare minimum, you should have one-to-one ratio as it means there is sufficient cash available for paying all the bills and meeting all your obligations. For breathing easier, two-to-one ratio is what you should be targeting. However, if there is some really big number that is stuck in the receivables, it means there is not enough cash available.
In case, if your business is indebted, you can find it on a quick check sheet. Here the point is that you should be aware of the ratio that you want to achieve. Determine if you have to establish your budget for paring down the level of debt.