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Business Financials – Financial Ratios that give you insight to Financial Health of your business
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Published on Thursday, 02 March 2023 10:51
Once you have transactions recorded and bank and credit cards and loans reconciled, an important business finance task each month is to gain insight to financial health with ratios to track how the business is tracking.
To save time, use the reporting features to generate some key margins and ratios.
Margin is reported as the % or $ amount, eg 45% or $56,800
Ratio is often the % or decimal amount, eg 0.45 for 45%, are both the same thing
These are like a report card for your business.
The most common to ratios are –
- Profit ratios – 3 types - Gross Operational and Net;
- Current ratio;
- Quick ratio;
- Debt to equity ratio;
- Working Capital.
Use the Profit & Loss statement –
Tip – in MYOB choose with YTD (year to date),
or in Reckon/Quickbooks, modify to include the YTD.
Profit Ratios= There are 3 levels of profit
Gross Profit is Sales less Cost of Sales,
Operational Profit is Gross Profit less Overhead Expenses,
Net Profit is Operational Profit less any unusual expenses,
see our Business Profit and Loss Statement and Profit Marginspost for more detail to understand more and how to calculate manually.
Then compare to your peers - Do you know what your industry Gross Margin % is?
Call us and we can give you a guide for FREE!
Use the Balance Sheet to look at the next ratios, which give an indication of the health of your business –
Current Ratio = Total Current Assets / Total Current Liabilities
This confirms whether the business has enough current assets to meet payment of its current debts (current refers to assets and liabilities that will fall due within 12 months). It includes inventory value, as this will be turned over in less than 12 months. Read more here
Quick Ratio (Acid Test) = Cash + Receivables/Debtors / Total Current Liabilities
This is like current assets without inventory which can take time to sell if a fire sale is needed, and is mostly the liquid assets. The higher the amount the more “Stable” the business is. That is, the higher it is, the longer the company can stay afloat. Read more here
Debt to Equity = Debt/Equity
Divide the amount of debt usually total liabilities) by the equity (owner’s or shareholder’s). the lower the better, but some debt can help you grow and is called leverage – debt can be beneficial, but it must be manageable – higher than 1 can be a warning to keep a close eye and manage the debt carefully. Read more here
Working Capital = Current Assets less Current Liabilities (CA-CL)
Subtract Current Liabilities total form Current Assets. In a healthy business, ideally, we want Assets (that can be turned into cash within 12 months, such as Cash, Inventory, debtors who owe the company etc) (ie “Current” means within 12 months)) to be GREATER than Current (12 months) Liabilities. Read more here
Can you see that huge value lies in your bookkeeping accounting records? The books are and asset not a liability or expense – they are an invaluable source, so use your bookkeeping to get key financial ratios to track how the business is going.
Need help? Not sure? Call for FREE 30min advice / strategy session today!
Call 0407 361 596 Aust and also get FREE “Avoid these GST mistakes” – There’s 18 that the Tax Office see regularly – Get them right! Email info@accountkeepingplus.com.auor call 0407 361 596 Australia
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