Email+1 (610) 998-5198
Financial Ratios Every Business Owner Should Monitor

Financial Ratios Every Business Owner Should Monitor

··3 min read

Financial Ratios Every Business Owner Should Monitor

Numbers tell the story of your business. These key financial ratios help you understand what's really happening.

Profitability Ratios

Gross Profit Margin

Formula: (Revenue - COGS) / Revenue × 100

What it measures: How much profit you make on each sale before operating expenses

Good benchmark: Varies by industry

  • Retail: 20-50%
  • Service: 50-90%
  • Manufacturing: 25-35%

Net Profit Margin

Formula: Net Income / Revenue × 100

What it measures: Bottom-line profitability

Good benchmark: 10%+ is generally healthy

Liquidity Ratios

Current Ratio

Formula: Current Assets / Current Liabilities

What it measures: Ability to pay short-term obligations

Good benchmark: 1.5-2.0

  • Below 1.0: Liquidity problems
  • Above 3.0: Inefficient use of assets

Quick Ratio

Formula: (Current Assets - Inventory) / Current Liabilities

What it measures: Immediate liquidity without selling inventory

Good benchmark: 1.0 or higher

Efficiency Ratios

Accounts Receivable Turnover

Formula: Annual Revenue / Average A/R

What it measures: How quickly you collect payments

Good benchmark: Higher is better

  • Calculate average collection period: 365 / A/R Turnover

Inventory Turnover

Formula: COGS / Average Inventory

What it measures: How quickly you sell inventory

Good benchmark: Varies by industry

  • Grocery: 15-20
  • Retail clothing: 4-6
  • Auto dealers: 6-8

Leverage Ratios

Debt-to-Equity Ratio

Formula: Total Debt / Total Equity

What it measures: Financial leverage and risk

Good benchmark:

  • Below 1.0: Conservative
  • 1.0-2.0: Moderate
  • Above 2.0: Aggressive

How to Use These Ratios

  1. Calculate monthly to spot trends
  2. Compare to industry benchmarks
  3. Track changes over time
  4. Investigate significant variations
  5. Use for strategic decisions

Getting the Data

Most ratios require:

  • Accurate, up-to-date bookkeeping
  • Properly categorized transactions
  • Regular financial statements
  • Industry comparison data

Dashboard Monitoring

Set up a dashboard to track:

  • Current ratio
  • Gross profit margin
  • Net profit margin
  • Days sales outstanding
  • Cash runway

SmartBooks Accounting provides monthly financial ratio reports with industry comparisons. Let us help you make data-driven decisions.

Share: