Key Financial Ratios for Small Businesses

You don’t need to be a finance expert to understand the health of your business. By looking at a few key financial ratios, you can gain valuable insights into your company’s performance and make smarter decisions.

Here are three ratios every small business owner should know:

• Gross Profit Margin: This ratio tells you what percentage of every dollar in sales you keep after paying for the costs of producing your goods or services. A higher gross profit margin means your business is efficient at creating its product.

  • Formula: (Revenue - Cost of Goods Sold) / Revenue

• Current Ratio: This measures your business's ability to pay its short-term liabilities (like bills and loans) with its short-term assets (like cash and accounts receivable). A ratio of 1 or higher is generally good, as it means you have enough assets to cover your debts.

  • Formula: Current Assets / Current Liabilities

• Debt-to-Equity Ratio: This shows how much of your business is financed by debt versus how much is financed by the owners' investment. A high ratio indicates that the business is primarily funded by debt, which can be a riskier position.

  • Formula: Total Liabilities / Total Equity

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Analyzing these ratios regularly helps you identify areas of strength and weakness and provides a clear financial picture to help you plan for the future.

If I can be of any help, please reach out to me at; mdaviscpb@qbocleanups.com