Using Financial Ratios
Financial Ratios provide you with a quick and simple way of looking at your financial position. Composed of a few simple pieces of information and some math, these ratios may be useful when determining loan eligibility, protection against a financial crisis or your current debt ratio.
Ratio |
What You’ll Need |
When You Should Use It |
Formula |
| Current Ratio | Current Assets | Use this when you need to demonstrate your ability to quickly pay for your liabilities for the year. Creditors typically look for a higher percentage of assets. | Current Assets/ Current Liabilities |
| Quick Ratio | Cash
Notes |
Similar to the current ratio, use this to demonstrate your ability to quickly pay off or invest in something. This doesn’t include your inventory or the work you are planning to sell. In this case we are looking primarily at yourcurrent cash. | (Current Assets -Inventory)/ Current Liabilities |
| Debt Ratio | Total Debt Amount | This ratio focuses on your long-term debt (mortgages, student loans, etc). Lenders look for a smaller ratio when deciding on giving you a loan. | Total Debt/ Total Assets |
| Gross Profit Margin | Total Sales | This ratio will demonstrate how much you made on the sale of your work after you figure in the costs associated with creating it. | (Total Sales-Cost of Goods Sold) / Total Sales |