This blog post will be highlighting important accounting ratios for small businesses. As a small business owner, you need to be able to read the hand writing on the financial wall of your business before it becomes too late.
Important accounting ratios for small businesses are your gateway to understand and appreciate the financial health of your small business.
One of the important uses of ratios is that they provide business owners with useful information that aide management in performing their management functions.
Financial ratio analysis is not and should not be the exclusive function of your accountant. It doesn’t hurt to be equipped with knowledge of important accounting ratios for small businesses.
You don’t need to do the calculations, leave that for your accounting software but you must know what ratios are important and useful to your day to day running of business.
The reason for this is because small businesses that are just starting up needs to know when to hire a small business accountants as their fees are not cheap.
3 IMPORTANT ACCOUNTING RATIOS FOR SMALL BUSINESSES
Low liquidity ratios could be a sign that a company is overtrading but some industries are known to have low liquidity ratios. There are two ratios to be calculated under liquidity ratios and they are:
- Current ratio
- Acid test ratio
Profitability Ratios: one of the most important reasons why many people set up their own business is to make profit. You can tell if you are making profits if you don’t analyse your financial statements.
There are many components of profitability ratios that business can use to seek answers to their profitability issues but our attention is on small businesses and the ratios mentioned below are for small businesses.
- Profit margin ratio
- Return on assets
- Return on capital employed
- Return on equity
Growth and Sustainability Ratios: growth is a natural thing that must be experienced by every business if they are to survive.
- Inventory turnover
- Debt to equity ratio (not all small businesses need this)
- Employee to sales ratio
- Working capital ratio
- Lead to conversion ratio
Note that there are loads of ratios that businesses typically calculate but this article is focusing on the important accounting ratios for small businesses.
I must at this point bring to your attention that the calculation of ratios is a process and not an end product. It is what you do with the ratios that really matters.
Ratios at the very least should be used for analytical and decision making purposes. When used properly, ratios can highlight any potential danger of overtrading that a company is not aware of.
You must have noticed that no calculation is made in this article as you can easily obtain cheap or free small business accounting software which you can as an entrepreneur use to automatically calculate these ratios.
Your energy as a small business owner should be channelled toward branding, promoting, developing and implementing business strategies.