Measuring the health of your business with ratio measures

As Christmas approaches, it’s the perfect time to reflect on your business’s performance and plan ahead for the New Year. Just as we prepare for the festive season with to-do lists and careful budgeting, measuring the health of your business ensures you're set up for a prosperous future.

In the hustle and bustle of daily operations, it’s easy to overlook the bigger picture. Taking stock of your business’s financial health now will allow you to identify strengths, spot early warning signs of potential issues, and plan effectively for success in 2025.

Using simple yet powerful ratio measures, you can gain insights into your business’s performance. Let us guide you through assessing your business’s financial health, so you can enter the New Year with confidence and clarity.

Liquidity Ratios

Liquidity ratios are about how quickly you can turn your business assets into cash - which helps you assess whether you can pay the bills if cash flow gets tight.
High ratios are better, as this means you’ve got more assets than liabilities.

Current ratio

Current ratio = Total current assets / Total current liabilities

As a general guideline, 2:1 is a good current ratio, but this depends on the industry you’re in and the nature of the assets and liabilities.

Quick ratio

Quick ratio = (Current assets – stock on hand) / Current liabilities

This measure excludes your existing stock, which you may not be able to turn into cash quickly, and is seen as a more realistic quick snapshot of your position.

Solvency ratios

Solvency ratios examine sources other than cash flow to determine whether your business will be able to settle debts.

Leverage ratio

Leverage ratio = Total liabilities / Equity

This measures whether your business relies on debt financing or equity to fund your assets. A higher ratio can make it harder to borrow money.

Debt to assets

Debt to assets = Total liabilities / Total assets

This tells you what percentage of assets is being financed by liabilities.

Profitability ratios

Profitability ratios will tell you how efficient your business operations are. Where possible, it’s good to measure your business against others in your industry.

Gross margin ratio

Gross margin ratio = Gross profit / Total sales

This ratio tells you whether you can cover the necessary business overheads from your sales.

Net margin ratio

Net margin ratio = Net profit / Total sales

This measure tells you the percentage of sales left after your operating expenses, before any taxes.

Checking in on your business health is a great habit to get into. Using these ratios helps you understand your current business health and allows you to plan.

Contact us if you need any support in calculating the factors in these ratios and assessing your business’s financial health so you can enter the New Year with confidence and clarity.