Secrets to Monitoring the Health of Your Business in QuickBooks

How healthy is your business?  Many businesses just look at their profit & loss statement (aka income statement), but you could be missing out on some helpful information.

Did you know that your Balance Sheet can explain why you might be struggling to pay your bills even though your P & L shows a profit?  Banks will use ratios to analyze your financial statements as part of the loan approval process to determine if you’re a “safe” risk.  So, it’s helpful to know in advance what they’ll see.  Because acceptable ratios can vary by industry, you might check with your accountant or trade association for those numbers.  This would also let you know how you compare to those in the same line of work.

In my article on the Profit & Loss report,  I discussed 2 key metrics – Gross Profit Margin and Net Profit MarginIn this article we’ll take a look at three ratios that are easy to get, but often ignored – Quick Ratio, Current Ratio and Debt Ratio. To calculate these ratios, you need to run your Balance Sheet (I know many of you do not), and that the Balance Sheet is in good shape (i.e. you don’t have negative Accounts Receivable or negative credit card balances or negative payroll or sales tax liabilities, etc.).

Quick Ratio – looks at liquidity – how easily you can pay your short-ratioterm obligations (payables and other current liabilities) This is typically your bank accounts and receivables, although some businesses may have other assets that can be converted to cash quickly (90 days or less).  A ratio of less than 1 means you’re struggling to pay your bills (even if your P & L shows a profit).

For a true picture, you will want to include the “current portion of long-term debt”.  In other words, if you have 4 years left on a 5-year loan, move 12 months of principle from long-term liability to current liability.  (Your accountant or lending institution could help you determine this number if you need assistance.) This can be a substantial dollar amount depending on the number and size of your loans.  But even if you don’t do this, it can still be a good eye opener.

Current Ratio– This also looks at liquidityratio and the ease of paying for your various obligations, but includes assets that can be converted to cash in a year or less, e.g. inventory and prepaid expenses. Simply divide your Total Current Assets by your Total Current Liabilities.  In this example (in blue), you would take 302,185 divided by 54,690.   Commonly acceptable current ratio range is 1.5 to 2.0, but this varies by industry so best to check with your accountant.

ratio

Debt Ratio– What percentage of your ratiobusiness is financed by debt? To get this ratio, divide Total Liabilities (debt) by Total Assets.  For Quality Built Construction, you would take 68,675 divided by 374,142 (highlighted in red). The higher the ratio, the greater risk you pose to lending institutions. What’s acceptable will depend on your industry and lending institution.

So, take a look at these ratios for your business and see what you get.  If you want to know if they are good or bad, your accountant can help you determine how you are doing for your industry.  I would recommend that you look at these at least quarterly if not monthly.  Most of you will probably see these ratios will fluctuate seasonally.

And, if you’re not sure if your balance sheet is in good shape, your accountant can give you a quick yes or no – hopefully you’ll get a yes. If it’s no, we’ll be happy to see what may be going wrong in your QuickBooks.

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