# Business Finance 101 – Key business financial ratios to give you insight to the financial health of the business?

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.

Margin is reported as the % or \$ amount, eg 45% or \$56,800.

Ratio is often the decimal amount, eg 0.45 for the 45% are both the same thing.

The most common to monitor are

• Profit ratios – 3 types – Gross Operational and Net
• Current ratio,
• Quick ratio and
• 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 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?

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.

The key is to 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.