Being a business owner has always been stressful, now, it can be overwhelming. You can’t help but think about the health of those around you. The health of your employees, your customers, your family, but what about the health of your business? You would do whatever is needed to keep your family, employees and community safe and healthy. But when is the last time you looked at your business and its financial health? You probably look at your P/L Statement monthly or maybe quarterly, when is the last time you sat down and really looked at your Balance Sheet? Do you glance at it, make sure it balances, breathe a sigh of relief and move on?
Your Balance Sheet is an often-underutilized tool to measure the health of your business. The strength of your Balance Sheet is instrumental in your ability to survive an economic downturn. It is more than a list of what your business owns and owes. It provides you with a basic overview of your financial health and your company’s stability. You may think the Balance Sheet isn’t an important document to review, but your loan providers and potential investors will say otherwise.
I want to discuss a few numbers that will help get you comfortable looking at your balance sheet and understand what it is telling you.
First, a few comments about your Balance Sheet and P/L Statements. View your business health the same way you view your personal health. The quality of nutrients you put into your body is comparable to the quality of data you input into your accounting program. Just like in your personal life, make small changes that you can commit to. Get comfortable with the numbers and ratios we are talking about today. Don’t try to look at every ratio or calculation just yet. It is easy to get overwhelmed and fall back into unhealthy habits.
Ready to rip off the Band-Aid and really look at the health of your business?
Current Ratio = Current Assets ÷ Current Liabilities
Your current ratio is an important measure of a business. It tells you how easy and quickly you can get cash. Does your company have enough cash and short-term assets on hand to pay bills in the short term?
I suggest keeping your Current Ratio above 2.0. If the current ratio falls below one, this is the first sign that your business may be sick, and you may struggle to meet your short-term needs. If you notice your Current Ratio decreasing month over month, this could mean your profitability is decreasing. Step in early to make the changes needed.
Quick Ratio = Current Assets – Current Inventory ÷ Current Liabilities
At first glance, you may not see the value of looking at both the Current and Quick Ratios. This ratio takes inventory out of the mix. Selling inventory takes time so removing inventory gives you a more cautious view of your company. Comparing your Current and Quick Ratios also gives you an idea of how much you have tied up in inventory.
For the Quick Ratio, a number over 1 is considered financially healthy.
Debt to Asset Ratio = Total Liabilities ÷ Total Assets
The debt to asset ratio shows you the percentage of assets that were purchased through debt. If the ratio is high, it means you are growing your business by going into debt. Your creditors and loan providers use this to check your ability to repay your debt. It can significantly influence your ability to receive loans. The lower the ratio, the lower the risk.
Net Working Capital = Current Assets – Current Liabilities
Simply put, your Net Working Capital tells you how much money you have easily available to meet current expenses. Comparing this number to previous months will show you month to month changes and will help you understand the trends of your business.
The numbers above are a great first step to monitoring your businesses health. They are an easy way to give your business a monthly check-up. Just like with your personal health, it is important to listen to what your business is telling you. Be aware, willing to make changes, and know when to reach out for support. Stay on top of your business and keep moving in a positive direction. You’ve got this!