Being an entrepreneur is a dream to many. We all want to do something we are truly passionate about, be our own boss and live freely. Although many of us start a business for the freedom, we shouldn’t forget that business has to turn a profit if you are looking to make a living
A successful business depends on several factors but three main factors are marketing strategy, goods and services, and healthy customer relations. All of these factors are key components of profitability. Profitability is the management of the money coming into your business and coming out of your business.
You have to keep track of your company’s finances to measure the sustainability of your business. One of the main ways to do this with is financial ratios. There are many financial ratios that can help as profit tools. They help implement your business profitability, liquidity, and financial structure.
I am going to share 3 financial ratios below to help you manage the sustainability of your business.
1.) Net Worth
Net worth = Asset – liabilities
Your company’s’ net worth is the business assets minus the business liabilities.
This is what determines if a business is worth millions. The net worth equals a million dollars. If you do not like the net worth of your business you will need to focus on increasing your assets and reducing your liabilities. Create a daily, weekly, monthly, quarterly plan that will allow you to meet your desired net worth.
2.) Working Capital
WC= Current Assets / Current liabilities
Your working capital is your current assets divided by your current liabilities. This is a little different than net worth. It takes only you current asset and liabilities. This is an indication whether or not a company has enough short term assets to cover its short term liabilities.
3.) Return of Equity
ROE = Net Income / Shareholders equity
This ratio determines the profitability of a business. It measures how well a company’s uses investments to generate earnings to grow the company.
These are just a few financial ratios that business owners can you use to see the financial health of a business.
I am honored to share my upcoming free webinar that will cover these ratios and much more. The ultimate goal of the webinar is to share how to wear the hat of a CFO. From understanding bookkeeping to understanding Financial ratios and Cash flow management.