Measuring the health of your business with ratio measures

When running a business, it’s easy to get caught up in the day-to-day activities and lose sight of the big picture. Taking stock of your business's health is important. Knowing where you are allows for more effective planning, early warning about any issues, and the chance to chart a course for success better.

Some quick ratios will help you gauge your business's health. We can help you 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 can pay the bills if cash flowgets tight.

High ratios are better, as this means you’ve got more assets than liabilities.

Current ratio

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

Quick ratio = (Current assets – stock on hand) / Current liabilities

This measure excludes your existing stock, which you may not be able to turn into cash quickly, 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

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

Profitability ratios will let you know how efficient your business operations are. It’s good to measure your business against others in your industry where possible.

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 understand your current business health and allows you to plan.