The key financial ratios every business owner should track-especially for decision-making, cash flow management, and long-term sustainability.
These are the most practical and actionable for small to mid-sized businesses
|
RATIO |
FORMULA |
WHY IT MATTERS |
What is Better Higher / Lower |
|
Net Profit Margin Ratio |
Net profit/Revenue |
Show how much of each Rupees earned becomes actual profit after expenses. Help assess overall profitability. |
Higher is Better |
|
Gross Profit Margin Ratio |
(Gross Profit/Revenue) |
Reveals how efficiently you produce goods or services. If this is low, your cost of production or service delivery might be too high. |
Higher is Better |
|
Operating Cash Flow Ratio |
Operating Cash Flow/ Current Liabilities |
Tells you if yours business generates enough cash to pay current obligation without raising external funds. |
Higher is Better |
|
Current Ratio |
Current Assets/Current Liabilities |
Indicates short-term financial health and ability to pay bills on time. |
Higher is Better |
|
Debt-to-Equity Ratio |
Total Liabilities/Shareholders' Equity |
Helps you understand how much your business is relying on debt vs. your own investment. High leverage can be risky. |
Lower is Better |
|
Accounts Receivable Turnover |
Net Credit Sales/Average Account Receivable |
Shows how quickly you're collecting from customers. Slow turnover=possible cash flow production. |
Higher is Better |
|
Inventory Turnover Ratio |
Cost of Goods Sold/Average Inventory |
Too Low = Overstocking or slow-moving products Too High = Frequent stockouts. |
Higher is Better |
|
Break-Even Point |
Fixed Costs/( Selling Price- Variable Cost Per Unit) |
Tells you how many units or how much revenue you need to cover all expenses. |
Lower is Better |
|
Return on Investment(ROI) |
(Net Profit from Investment - Cost of Investment)/ Cost of Investment |
Useful for evaluating the success of marketing campaigns, new equipment, or expansion decisions. |
Higher is Better |
CAclubindia
