Where does a balance sheet fit in when reviewing the health of your business?
A balance sheet shows your assets, liabilities, and equity.
On your balance sheet your assets subtracted by your liabilities NEED to equal your equity that you are showing. If they don't.... we've got problems that need fixing.
If everything lines up, that's great! It's time to start digging into the different ratios and trends that can help indicate the health of your business. Here are some to consider running starting today:
Liquidity & Short-Term Health
Current Ratio = Current Assets ÷ Current Liabilities
It's your ability to pay short-term obligations. Aim for 1.5–2.0 (greater than 1 means you can cover your bills).
Quick Ratio = (Cash + Accounts Receivable + Marketable Securities) ÷ Current Liabilities
It's like the Current Ratio, but more conservative. It excludes inventory and prepaid assets. ≥ 1.0 is ideal.
Leverage & Debt Management
Debt-to-Equity Ratio = Total Liabilities ÷ Total Equity
It shows how much your business is financed by debt vs. your own investment. Benchmarks vary by industry, but generally < 1.5 is considered healthy for small businesses.
Debt Ratio = Total Liabilities ÷ Total Assets
Shows what percentage of your assets are financed with debt. Lower is better. Under 0.6 is a conservative target.
Efficiency & Operations
Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable
It shows how quickly you're collecting payments from customers. Higher is better. Low turnover means slow collections/cash flow risk.
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
It shows how fast you're selling and replacing inventory. The ideal ratio depends on your industry. A higher number generally indicates better inventory management.
Owner’s Equity Health
Working Capital = Current Assets – Current Liabilities
Shows how much buffer you have to operate and invest. Positive working capital = breathing room.
Return on Equity = Net Income ÷ Owner’s Equity
It shows how efficiently your business is using invested capital to generate profit. 15–20% is often considered good, but depends on your industry and business model.