5 common financial ratios small business owners need to know
Common Financial Ratios
1. Debt Ratio (Total Liabilities / Total Assets)
The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a company's assets that are financed by debt. The higher this ratio, the more leveraged the company and the greater its financial risk.
2. Current Ratio (Current Assets / Current Liabilities)
The current ratio is a market profitability ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities.
3. Working Capital (Current Assets - Current Liabilities)
Working capital is a measure of both a company's efficiency and its short-term financial health. Working capital is calculated as: Working Capital = Current Assets - Current Liabilities.
4. Assets-to-Equity Ratio (Total Assets / Owner's Equity)
The asset/equity ratio indicates the relationship of the total assets of the firm to the part owned by shareholders (aka, owner’s equity). This ratio is an indicator of the company’s leverage (debt) used to finance the firm.
5. Debt-to-Equity Ratio (Total Liabilities / Owner's Equity)
'Debt/Equity Ratio' A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.
This series ongoing series handbook prepared by Marjorie Weber was prepared will also be part of the Miami Bayside Foundation to qualify small business owners for the Miami Bayside Foundation loan program.
Handbook series Small Business Start Up
Part 1: Small Business Start Ups Making It Legal; Part 2: Small Business Start Up Capital Access Primer and Key Steps ; Part 3: Definitive Steps to Create the Optimal Small Business Growth Team Part 4: Once You Have the Dream Team, It's About Employee Retention, Part 5: Delegating Responsibilities Policies and Procedures - Letting Go Part 6: Breaking Down the Set Up of Small Business Financial Records Part 7: Three Best Bet Picks for Small Business Accounting Software Part 8: To Lease or To Buy? Issues Relating To Both In Today's Market part 1 Part 9 Decided on a Business Lease? 20 Lease Provisions Part 10 What Small Business Contracts Are Required and Who Reviews? Part 11 What are the most serious small business risk and coverage issues? Part 12: Keeping Sightlines on Specific Small Business Target Markets Part 13: Small Business Targeting and Related Branding Components Part 14: Keys to Developing an Essential Small Business Marketing Plan Part 15: Small Business Social Media Blocking and Tackling 101
About the author
Marjorie Weber has been educating entrepreneurs and guiding them in their search for capital for the past 16 years: combining business training programs with one-on-one mentoring. Marj is currently the executive director of Primed2Grow, a Miami based consultantcy. Most recently Maj was a financial advisor for Florida SBDC at FIU. She was Chair of SCORE Miami Dade from 2010 to 2014. She also serves as an advisor to the Goldman Sachs 10,000 Small Business Program and the SBA Emerging Leaders Program and provides training for Veterans seeking an entrepreneurial path upon retirement from the service. She has facilitated workshops under the auspices of Miami Bayside Foundation, Little Haiti Cultural Center and .local banks. She commenced her career as a real estate investment banker in New York and Miami..She uses these long term relationships to assist her clients in accessing capital. She knows both the process and the people and has assisted in providing financing for hundreds of businesses in Miami Dade.