How well is your business really doing? This question can often leave business owners scratching their heads. Most of the time, we rely on numbers, but without proper analysis, these figures hold no power. Our guide will help you understand these numbers, enabling you to tell your business's story and make better decisions as a business owner. So, let's jump into the analysis!
Profitability Analysis
Profitability is a key measure of a business's success. Understanding your profitability ratios can provide insights into how efficiently your business is operating. Let's break down a few essential profitability ratios.
Net Profit Ratio
Net profit ratio is calculated as (Sales - Expenses) / Sales. This ratio helps measure how much of your revenue is going towards expenses. Ideally, businesses should aim for a higher net profit ratio as it indicates that less of your sales are going towards expenses.
Return on Equity
Return on Equity is calculated as Net Income / Equity. This ratio shows the overall return of your investment in your business based on your profit levels. A higher return on equity indicates a greater reward for the risk your business takes.
Profit Goals
Profit goals can be determined using the equation Price x Quantity. This formula can help you determine how attainable your goals are by working backwards to figure out the price or quantity of your goods/services you need to sell.
Liquidity Analysis
Liquidity is another crucial aspect of business finance. It determines your company's ability to pay off short-term debts. Let's dive into some important liquidity ratios.
Current Ratio
The Current Ratio is calculated as Current Assets / Current Liabilities. This ratio shows your company's ability to pay off your short-term debts based on your assets expected to be turned into cash within the next year. A higher ratio indicates a higher liquidity.
Cash Ratio
The Cash Ratio is calculated as (Cash + Accounts Receivable) / Current Liabilities. This ratio uses a stricter definition of current assets by excluding inventory. The assets used in this ratio are certain to be converted into cash quickly.
Operating Cash Flow Ratio
The Operating Cash Flow Ratio is calculated as Operating Cash Flows / Current Liabilities. This ratio shows how many times your current operating cash flows can pay off your current liabilities. A higher ratio indicates a higher confidence in your company's ability to pay off short-term liabilities.
Final Thoughts:
So, how well is your business really doing? If you've calculated all your business ratios, congratulations! You're on the path to understanding your business's financial health more deeply. If you felt a little overwhelmed by all these numbers, that's totally okay. In fact, that's why I'm here. By downloading this guide, you've shown you're serious about having a financially strong business, and those are the types of business owners I love to work with!
Charese Chambers
Email: charese@financialfancy.com
Contact: (804)491-8184
Website: www.financialfancycfo.com
What to get a copy of the Financial Analysis Freebie
Comments ()