Is Your Business Healthy?

Many business owners and managers see customers coming through the door, sales being made, and cash in the bank. An indication that all is going well. Under the surface, though, there may be issues. As with all issues, these become more apparent and challenging to resolve when left unaddressed. Fortunately, there are tests leaders can use to determine the health of their business and what to focus on to make them stronger.

While having cash in the bank is a good thing, how does one know if the amount is sufficient? Conversely, is there excess cash that could be put to better use? What about other short-term assets and liabilities? Calculating the business’ Current Ratio (Current Assets/Current Liabilities) indicates how well the company maximizes its liquidity to cover debts and obligations. A ratio of greater than one suggests the company can cover its short-term debts. A ratio of less than one may signal the business will have difficulty meeting immediate obligations, indicating potential liquidity problems. Too high of a ratio can suggest assets aren't being used efficiently.

Debt can be beneficial to helping a business grow, but how much is too much? The Debt-to-Equity Ratio (Total Liabilities/Equity) illustrates how much a company relies on debt compared to equity financing. A ratio of less than one means the company relies more on equity, suggesting financial stability and lower risk. A high ratio means the company uses more debt, indicating aggressive financing and potentially higher risk.

Are the business’ assets being used to maximize revenue? The Asset Turnover Ratio (Net Sales/Average Total Assets) demonstrates how well a company uses its assets to generate sales. A high ratio shows the company is effective at using its assets (like equipment, inventory, property) to produce revenue. While a low ratio may signal inefficient asset use, excess inventory, or slow operations, requiring deeper analysis.

Is revenue sufficient to cover the company’s costs? How is this trending? The Operating Margin (Operating Income / Revenue) shows how much profit a company earns relative to sales. That is, for every dollar of sales, how many cents are left over to cover non-operating costs (interest, taxes) and generate net profit. A positive margin means the core business is profitable, while a negative margin signals it is operating at a loss.

Used together, these, and other ratios, can help leaders evaluate their company’s health. While acceptable levels will vary by industry, R&A CPAs can provide a better sense of how each company compares to its peer group. If your business needs assistance evaluating its health or with any other accounting activities, you have access to experienced financial leadership, tailored support, and strategic advice. If you would like to know more about how R&A can help your business, give us a call. We are here to help.