6 ways to measure your business health

6 Ways To Measure The Health Of Your Business

It is very easy to be caught up in the day to day running of your business and lose sight of the bigger picture. Taking stock of your business health is important. Knowing exactly where you are will allow for better planning strategies, early warnings for any issues, and opportunities to chart better courses for the success of your business.

To help gauge your business health there are some quick ratios that can help . Solve Accountants can help you assess the health of your business and explain how you can calculate these checks.

Liquidity Ratios

The liquidity ratio calculates how quickly you can convert the assets of the business into cash – this helps assess if you are able to pay the business bills.

The higher the ratio the better, this means that the business has more assets than liabilities.

Current ratio

Current ratio = Total current assets / Total current liabilities

Dependent on the type of industry the business is in, and nature of the business assets and liabilities, a general guide, 2:1 is a good current ratio.

Quick ratio

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

The quick ratio excludes existing stock from the calculation, which may not be converted quickly to cash.  This ratio is a more realistic snapshot of the business position.

Solvency ratios

Solvency ratios look at sources besides cashflow to assess the business ability to settle outstanding debts.

Leverage ratio

Leverage ratio = Total liabilities / Equity

This ratio measures if the business is reliant on equity or debt finance to fund assets. Higher ratios will make it more difficult to borrow money.

Debt to assets

Debt to assets = Total liabilities / Total assets

This calculates the percentage of assets that are being financed by the business liabilities.

Profitability ratios

Profitability ratios calculate the efficiency of business operations. If possible, it is recommended to measure against other businesses in the same industry.

Gross margin ratio

Gross margin ratio = Gross profit / Total sales

The gross margin ratio will tell you if your business can cover the business overhead costs from the sales income.

Net margin ratio

Net margin ratio = Net profit / Total sales

This ratio calculates the percentage of sales dollars remaining after your expenses have been settled (except income taxes).

Giving your business health a regular check up is a good habit to get into. Using the ratios will help you to understand the current health of your business and will allow you to plan for the future. Talk to the team at Solve Accountants about how to calculate these ratios to keep your business heading on the right track.

If you are located on the Gold Coast or surrounding areas Contact Us at Solve Business Accountants if you need help with your business tax.

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