With several months of transactions recorded and bank and credit cards and loans reconciled, an important business finance task each month is use the hidden value in your bookkeeping to get key financial ratios to track how the business is going, to understand your business financial health.
To save time, use the reporting features to generate some key margins and ratios. These are like a report card for your business. The most common to monitor are –
- Gross profit,
- Net profit,
- Current ratio,
- Quick ratio and
- Debt to equity ratio.
Use the Profit & Loss statement – Tip – in MYOB choose with YTD (year to date), or in Reckon/Quickbooks, modify to include the YTD. This will automatically give you a percent column that is the amount of Gross Profit or Net Profit as a percent of the total sales at the top. See our Business Profit and Loss Statement and Profit Margins post 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?
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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.
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.
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. See more
The key is to see that huge value lies in your bookkeeping 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.
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