How to quickly assess the financial health of your business: three simple indicators

The first indicator on which financial well-being depends is the current liquidity ratio. It is a measure of an organisation's solvency. Imagine that you are the captain of a ship, and your business is, in fact, the ship itself. So, the current liquidity ratio shows whether your ship will not go down at the first rocking. In simple terms, this ratio shows whether you have enough money to cover your immediate financial obligations if things suddenly go wrong (by the way, we talked about financial planning here).

The current ratio is calculated as the ratio of current assets (this is like cash in your pocket) to short-term liabilities (these are debts that need to be paid back soon):

• Current Liquidity Ratio = Current Assets / Current Liabilities

If the result is less than one, it is a wake-up call. It is worth thinking about a lifeline. If the result is from one to two, then your ship is stable afloat. But a score above two indicates an insufficiently efficient use of current assets

This metric demonstrates how efficiently you use your assets to generate revenue.

The asset turnover ratio is calculated using this formula:

• Asset Turnover = Revenue / Company Asset Value

What can you understand from the result? The higher the indicator, the better. It means that your assets do not lie dead weight, but work for you and bring profit.

So, we've looked at three critical metrics that can help you quickly assess the financial health of your business. Together, they provide a complete picture and help you understand if you are heading in the right direction. LLC «ElectraQuix» experts recommend checking these metrics at least once a quarter, or better yet, every month. Make a simple table, enter the data there and observe the dynamics. This will help you to notice problems in time and take measures.

We also recommend you to read our publication on the break-even point. You can do this by clicking here.