Business Ratio Analysis

There are a number of business ratios which potential lenders and investors will use in order to assess the relative health of your business. Ratio analysis is a useful management tool because it helps identify positive and negative trends in your business performance.

The data for your ratio analysis comes from your balance sheet and income statement. Your ratios should be compared to the ratios of similar businesses, which can be obtained from industry associations, business libraries, or your lender.

Ask your accountant or business advisor to help you calculate ratios relevant to your business. Useful ratios include the following:

Current Ratio: Comparing current assets to current liabilities is an indicator of your business' ability to pay its bills. For example, a ratio of 2:1 means that you have twice as many current assets, such as cash-on-hand, accounts receivable, and inventory, as you do current liabilities. Lenders and investors look more favorably at companies with high current ratios (generally above 2:1).