When you’re running a business, it’s easy to get caught up in the day-to-day activity and lose sight of the big picture. For this reason, taking stock of the health of your business is vital. This will allow for more effective planning, early warning about impending issues and, the chance to better chart your course for success.

There are some quick ratios that will help you in order to gauge the health of your business. We can help you to 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’ll be able to pay the bills.

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 quickly turn into cash, 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. Where possible, it’s good to measure your business against others in your industry.

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 to understand your current business health and allows you to plan. Talk to us about how to calculate the factors in these ratios in order to keep your business on the right track.

If you would like more information on how to implement any of these strategies,  feel free to contact Semmens & Co on 03 8320 0320 for a free consultation.

If you’re looking for more information on how to maximize tax benefits for your business, download our e-book Top 9 Tax Tips That Could Save You Thousands or, learn more about these strategies by registering to attend our webinar.