Business is all about decision making, trial and error, and growth. To determine your business’s successes and setbacks, you need to know how to measure performance. You can do this by creating and analyzing small business financial ratios.
Small business financial ratios let you compare current financial numbers to past performance. And, you can use small business ratios to make changes for the future. Instead of blindly running operations, financial ratios give you the data to make informed decisions.
What are small business financial ratios?
Financial, or accounting, ratios are percentages, decimals, or multiples that quantify the health of a business. These numbers show you how your business is doing during a specific time.
You can calculate financial ratios for small business by looking at your business’s financial statements. There are three types of financial statements: balance sheet, income statement, and cash flow statement. Most ratios come from the income statement or balance sheet.
Small business financial ratios show you what the numbers in your financial statements mean. Is your business doing well, or can you make improvements to your startup business plan?
In some cases, there is no standard healthy or unhealthy ratio number. Ratios will vary from industry to industry.
There are many different small business financial ratios you can use. Each ratio tells you something different about your business, like profitability and debt. Here are a few financial ratios you can use to determine the health of your growing business.
1. Gross profit margin ratio