Boost your profits with a few key financial Ratios that provide quick visibility into your small business? Ratios come in all different is shapes and sizes and can be made to be quite complex; my intent is to keep it simple here. Why not peel back the layers to see what really is going on in your business as shown in objective data? Select a product or a process. After you start using the analysis that best suit your business, you’ll have visibility into multiple layers of your business and the information you need to boost your profits.

Each type of ratio analysis is used for a specific purpose; think of a formula as a tool. A hammer has one purpose, while a screwdriver has another. We use the same concept. Ratios can be made quite complex, yet there are many simple ways to view them. Here are four fundamental types of ratios that encompass most of what you’ll be working with in your business:

Liquidity Ratios: Measures your ability to meet your short-term obligations

Quick ratio = Current assets- inventory/Current liabilities=X Ideal: 1.1

Leverage Ratios: Measures the proportion of debt in your financing

Times interest earned = Profit before taxes + interest charges/Interest charges=X Ideal: 8.0

Activity Ratios: Measures how effectively you are using your resources

Average collection period = Receivables/Sales per day=X Ideal: 21

Profitability Ratios: Measures returns on sales and investments

Profit margin = Net profit after taxes/Sales=%X Ideal: 12%

Follow me next week when I will illustrate how these ratios are generally used.

Even if you hate numbers, you can proceed through your business operation systematically to review what is actually happening vs. what you thought was happening. Assess whether liquidity, leverage, activity, or profitability analyses are a good place to start. There’s no one right answer; getting started somewhere is what’s important. Give it a go and see where the data takes you. If you need more data, see where you can collect it easily and consistently. Test your assumptions. Go deeper if your data doesn’t seem to make sense. Maybe there is a large discrepancy between what you thought your costs were vs. what they actually are. And what your profits are vs. what you thought they were after all the costs are factored in.

As you apply and implement simple measures, you will gain significant insights. The process can be repeated. After you boost profits in one area of your business, you can move to a new area or apply additional formulas to the same area to dive deeper. Profit maximization is a continuous process used by only the most successful business people.

You may never come to love numbers, and you don’t need to. But you will learn to respect their power. Managing your numbers will lead to a life of: Less pressure, Informed decision making, Improved problem solving, Improved investments, Better customer service and definitely more of the family time that you are in desperate need. You should be fully involved to guide and inform the process of selecting the core business analytics for your unique business, at first. Later on, you can delegate the routine analyses to others so you can track the trends that matter.

Remember – Just Say No to the Status Quo TM

Donna Marie Thompson, PhD

Creating your best profit solutions is my highest priority.

Author's Bio: 

Donna Marie Thompson, PhD is a Small Business Profitability Expert and Founder of Expert Profit Solutions. She is a two-time best-selling author who has spent most of her career problem solving in international management consulting.

Donna Marie has helped businesses meet their profit targets under challenging circumstances. She was a Director at PricewaterhouseCooper's Consulting, and has worked at Booz Allen, as well as local consulting firms. This wide range of experience in businesses of all sizes uniquely qualifies Donna Marie to guide small businesses to discover their hidden profit potential.

Donna Marie earned a PhD from George Washington University, an MBA from Virginia Polytechnic Institute, a CPA in the state of Maryland, and is a Master Practitioner of the Energy Leadership Index.

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