So, Your Business Survived, But How Strong Is It?

So, you made it. You kept your business alive through one of the worse recessions in U.S. history. And, not only have you survived, but with consumer spending increasing and access to credit markets showing marginal signs of improvement, the future of your company now appears to rosy once again.

The only questions that remain now are how strong is your business as it stands and if it is to grow in the future, how can you, the business owners, manage to that effect?

Measuring one's business can provide tons of information and insight. First, measuring for its strengths can show if and where it might be weak or needing improvement. Second, measuring your business's ability to grow and survive in the future can provide insights on what opportunities to undertake now and tomorrow as well as shield the business from any future economic downturn. And, lastly, measuring your business's current operations can reveal knowledge about how efficiently your business is using its assets to garner the greatest return. Further, these simple insightful measures can result in improved efficiencies, increased revenue at lower costs, increased profits and ultimately an increased ability to take on and conquer new and profitable opportunities - making your business the company of your dreams.

There are three standard forms of measuring your business - all of which are drawn from very simple financial ratios.

Financial ratios are, in a sense, a quick and easy method of measuring your business as it stands and thus gleaning insight on how to improve or at the very least how to keep it from collapse.

There are three major financial ratio measures:

Liquidity Ratios. Liquidity measures your company's ability to pay its immediate or short-term (under one year) obligations. If a business cannot pay its bills - it is destined to fail in the near term.

Current Ratio - The current ratio is derived by dividing your current assets by your current liabilities. This ratio shows how well your business is positioned to pay its current bills over the next 12 months. If this ratio is below normal or trending downward it could be an eye opening sign that your business is in financial chaos and, if steps are not taken NOW, could be out of business very quickly. Most businesses should have a current ratio between 1.50 to 1.90 - meaning that the business has 1.5 times in current assets to meet its current liabilities.

Quick Ratio - Like the current ratio, this measure shows if your business can satisfy its immediate (under 90 day) obligations using extremely liquid assets like cash and accounts receivables. Here, divide your cash balance and account receivables by your current liabilities. For most healthy businesses a ratio of 0.90 shows that the business has ample liquid resources to meet its immediate liabilities like payroll, interest payments and supplier invoices.

Safety Ratio. Safety measures your company's ability to withstand unfavorable market situations - like the current economic sluggishness or future market declines. The inability to withstand such market situation means your business is essentially standing on thin ice.

Debt To Equity Ratio - This ratio measure how much your business is relying on debt financing as opposed to equity or business cash flow to finance on going operations. Here, divide your total liabilities by your equity. A healthy business's ratio should be between 1.50 and 2.00 - a ratio of 2.00 means that the business has twice the amount of debt as it does equity. The lower the ratio the better - the stronger your business is by relying on internally generated funds and not outside obligations like debt.

Profitability Ratios. Profitability measures your company's ability to cover its overhead (all the expenses not directly related to providing your product or service). This shows your company's ability to cover marketing, selling and payroll expenses as well as taxes and interest payments.

Gross Profit Ratio - The goal of any business is to deploy its assets in such a way that it is earning the most for/from those assets. This ratio demonstrates how well the business is efficiently producing or providing products and services. It shows how well products are priced given the direct or variable costs it takes to create or provide them. The bigger the ratio, the higher the profit potential. Here, divide gross profit by sales. This ratio is best when viewed over time - so, go back several quarters and watch the trend on this ratio.

Pretax Profit Ratio - This ratio demonstrates how efficiently the business is operating overall - showing that expenses (specifically operating or overhead or fixed expenses) are not disproportionate - meaning that the business does not have more expenses than it needs to properly operate the business in generating profits. Here, divide pretax profits by sales. The higher the number the better - meaning that the business does not have excessive expenses in relations to the revenue it is generating.

As with all measures, even though these ratios measure how your business stands, they should always be viewed over time. To get the best insight, it is better to see how these ratios are trending - are they improving or are they falling. While your business may seem OK right now - was it operating better in the past or is it trending in the wrong direction today.

Running a business is much more than just helping a customer or providing a product - it is also about managing your operations and ensuring long term success. These financial ratios can keep you informed about how well your business is being managed to ensure the greatest possible profit potential - if you are not after the greatest possible profit - you should not be in business!

For more information about these ratios, their meaning and ways to improve - please visit these Financial Ratio Calculators -

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