If you manage your own business, a time will come when you’ll need to take into account your total assets and risks. Financial ratios are a great way to take stock of how well your business is doing. There are four basic categories of ratio you can use when examining your finances.
Liquidity ratios are a good first step to take as they measure the available cash you have on hand as well as the assets that you can convert to cash easily. You’ll simply divide the total assets by the total risks. If you find the ratio is low, it could be a sign that you’ll run into trouble when trying to meet your financial obligations.
In order to assess how well your business gets things done, you’ll measure its cash flow, inventory turnover, and daily operations over a period of years. If you manufacture or sell a product, inventory turnover is important as it denotes how long it takes you to sell everything you make. In such a case, efficiency ratios can help you see what changes you can make to your purchasing and inventory management.
As you are going through your inventory during an efficiency check, it’s a good idea to talk with a trusted security monitoring company. These companies use sophisticated software, like that provided by Circadian Risk, to not only help you analyze your current assets but assess possible risks to them. They can help you come up with a plan to mitigate these risks and keep your business safe.
Profitability here refers not only to how successful your business is on its own but how well it performs in relation to industry standards. The three key things you’ll look at here are net profit margins, operating profit margins, and the returns on your investment. Net profits are what you make before taxes and loans, operating profits are what is left over after these expenditures, and ROAs will show you how well the company is actually using your assets. To find out if you are getting a good return on your assets, you can divide your net profit by your total assets.
These ratios tell you how your company is doing in the long run, specifically how much debt may be propping up the business. A lower ratio is better in this case as banks want your assets mostly financed by your own money.
While the task of assessing your assets can seem daunting, it’s a necessary step if you plan to expand your company or change the way it handles money or operations.