Intelligence

Which Ratios Are Best for Measuring Your Business’s Financial Health

Measuring your business’s financial health on paper is a numbers game and it involves a little more than glancing at a balance sheet or cash flow statement. There are several ratios that can be used to gauge how well (or poorly) your business is faring. I’m looking for insight from a CPA or other tax expert on the following: 1. Why do solvency ratios matter and how much of a benchmark are they in measuring financial health? 2. What factors influence what a good profit margin looks like? How can you improve profit margin if yours is missing the target? 3. What does a higher (or lower) asset turnover ratio tell you about how your business is doing? What about inventory turnover ratios? 4. How can business owners objectively gauge ROI when evaluating investment opportunities? 5. Why is quick ratio important if you’re planning to borrow in the near future? How does this differ from the working capital ratio? 6. What does your accounts receivable turnover ratio say about your business’s cash flow efficiency? Any other commentary outside the scope of these questions and relevant to ratios is also welcome.