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The Benefits of Financial Ratios in Business Analysis

  • Writer: Brian R. Schobel, CPA
    Brian R. Schobel, CPA
  • 12 minutes ago
  • 2 min read

As a small business owner, you probably know your sales, your expenses, and whether you’re making a profit. But are you digging deep enough into your numbers to really understand your business health?


That’s where financial ratios come in. These quick calculations can turn a stack of financial data into easy-to-read insights—helping you make smarter, faster decisions.


Financial ratios are like performance snapshots of your business. They compare important numbers—like income, expenses, assets, and debts—to reveal how efficiently and profitably you're operating. Think of them as health check-ups, they quickly show how well your business is doing and where you may need to adjust.


How Ratios Help You Run Smarter

  • Make Informed Decisions- Before investing in equipment or hiring new staff, ratios show whether your business can afford it.

  • Track Financial Health- Ratios highlight whether your cash flow is stable, your pricing makes sense, and your debt is manageable.

  • Plan for Growth- Use ratios to set benchmarks and measure progress as your business scales.

  • Build Credibility with Lenders or Investors- Banks and investors often use ratios to assess risk—so understanding them puts you a step ahead.


3 Simple Ratios to Start Using Today

  1. Gross Profit Margin 

    What it tells you: Are you pricing your products right? 

    Formula: (Sales - Cost of Goods Sold) ÷ Sales

  2. Current Ratio 

    What it tells you: Can you pay your bills? 

    Formula: Current Assets ÷ Current Liabilities

  3. Net Profit Margin 

    What it tells you: Are you truly making money after expenses? 

    Formula: Net Profit ÷ Revenue


How to Use These Ratios

  • Review monthly or quarterly to catch changes early.

  • Compare with past performance to see trends.

  • Set goals for where you want your ratios to be.

  • Talk to your bookkeeper or accountant—they can help you track these easily.


Make Ratios Part of Your Strategy

Financial ratios aren’t just numbers—they’re tools that help you run a smarter business. Start by reviewing one or two ratios each month. Keep a simple spreadsheet or ask your accountant to help set it up. The more you understand your numbers, the more confidently you can grow your business.


Small changes lead to big results—especially when they’re based on the right data.



 
 
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