By tracking and understanding key financial ratios, you can spot trends, pinpoint potential issues, and make informed decisions that can safeguard your business’s future. However, understanding these ratios can be difficult, especially for busy business owners already juggling numerous responsibilities. That’s where partnering with a knowledgeable bookkeeping service like NorthStar Bookkeeping can provide a sense of relief and make all the difference. At NorthStar Bookkeeping, we go beyond basic bookkeeping. We provide financial reports that include ratios that are useful for businesses to refer to regularly to help with business decisions. Let’s explain some common ratios to measure and how they can improve your company’s financial standing.
Common Ratios to Measure The Financial Health of Your Business
Liquidity Ratios
Liquidity ratios assess short-term financial health for more informed, immediate financial decisions.
- Current Ratio: The current ratio compares your current assets (cash, accounts receivable, inventory) to your current liabilities (short-term debts). A healthy current ratio, typically above 1.0, indicates you have enough assets to cover your immediate costs.
- Quick Ratio: The quick ratio excludes inventory from current assets, providing a more conservative view of your cash flow. This ratio benefits businesses with inventory that might be slow to convert to cash.
Profitability Ratios
Profitability ratios assess a business’s ability to generate a profit using time-sensitive data.
- Gross Profit Margin Ratio: The gross profit margin measures the percentage of earnings (before taxes) after deducting the costs of production or services. It’s a key indicator of your pricing strategy and product/service profitability.
- Net Profit Margin Ratio: The net profit margin reflects the percentage of earnings that results in net profit after all expenses after deducting taxes.
- Return on Assets (ROA): ROA measures how effectively your business uses its assets to generate profit. A higher ROA indicates better management and utilization of resources.
Related Article: How to Analyze Profit and Loss Statement and Balance Sheet
Efficiency Ratios
Efficiency ratios examine how effectively your business operations are working, which can help you discover where you can look to make improvements.
- Inventory Turnover Ratio: The turnover of inventory ratio tracks how long it takes for you to sell and replace inventory. A high turnover generally indicates strong sales and efficient inventory management, while a low turnover might indicate overstocking or seasonal sales drops.
- Days Sales Outstanding (DSO): DSO reveals the average time it takes to receive payments. A high DSO can put a strain on cash flow, while a low DSO indicates efficient collection processes.
Outsource Your Bookkeeping to NorthStar Bookkeeping
At NorthStar Bookkeeping, we understand that financial ratios are just one piece of the puzzle. We provide robust bookkeeping and accounting services, including reports that discuss common ratios to measure the economic health of your business. We’ll help you track the right KPIs, interpret the data, and make informed decisions that move your business forward.
Related Article: How Much Does a Bookkeeper Cost in California
Contact NorthStar Bookkeeping today for a free consultation. Let’s discuss how we can empower your business with accurate financials and expert insights.