How financially healthy is your business? This template will help you decide.
By gathering lots of financial data about your business in one place, the Financial History & Ratios template makes it easy to analyze your finances and spot significant trends.
What Are Financial Ratios?
Financial ratios are measurements that bankers, potential investors, financial analysts and creditors use to assess your business’s financial condition. Ratios assess four different aspects of your business: liquidity, operations, profitability and working capital.
- Liquidity ratios measure whether your company has enough cash (or assets that can quickly be converted to cash) to meet its short-term financial obligations. The current ratio tells you whether your business’s current assets can cover its current liabilities. The quick test ratio excludes inventory and other assets that can be converted to cash and examines only liquid assets.
- Operations ratios measure how successful your business operations are. The operating profit percentage ratio measures the percentage of your sales that turn into profit. The inventory turnover ratio shows you how often your inventory is depleted and replenished each year.
- Profitability ratios measure business profits and include the gross profit margin, net profit margin and return on assets (ROA), which measures the profit your company generates annually for each dollar in assets it owns.
- Working capital ratios include the working capital ratio, which measures how much money would be left if you paid current liabilities out of your current assets, and the debt-to-net worth ratio, which measures how much money short- and long-term creditors contribute to your operations.
How to Use Financial Ratios
In order to complete the spreadsheet, you’ll need the past three years' financial statements for your business as well as your current year-to-date financial statements. Once you’ve input the information, compare your current business finances to those of past years. Look for significant changes in dollar values; in your business’s assets, liabilities and expenses; and in your financial ratios.
Regularly reviewing your financial ratios provides insights into your business’s financial situation and helps you keep tabs on its financial health.
If you need help understanding financial ratios, connect with a SCORE mentor online or in your community to get free, personalized advice.