Understanding which metrics to track and why will help you to grow your business. Learn what banks use to determine your credit-worthiness and how this influences your valuation.

1. KNOWING YOUR
FINANCIAL RATIOS
Presented by:
Jennifer Dye, MBA
Certified Business Advisor
Highline College SBDC
206-592-4153
jdye@highline.edu

2. WHY ARE RATIOS IMPORTANT?
• To give you a measurable metric of how you are doing
• To qualify for a bank loan
• To be able to compare your performance to that of your
competitors and the industry as a whole

3. WHICH RATIOS SHOULD I TRACK?
The ratios you monitor depend on your industry and what you are
wanting to know. Here are a few that I recommend for every business:
▪ The Common Size Ratio
▪ The Current Ratio
▪ The Quick Ratio
▪ Inventory Turnover Ratio
▪ Debt to Worth Ratio
▪ ROI – Return on Investment

4. WHAT IS A NAICS CODE?
The North American Industry Classification System (NAICS) is the
standard used by Federal statistical agencies in classifying business
establishments for the purpose of collecting, analyzing,
and publishing statistical data related to the U.S. business economy.
https://www.naics.com/search/
Knowing your NAICS code can help you decide which ratios to track.

5. PRODUCT VS. SERVICE BUSINESSES
▪ Maintains Inventory
▪ Has storage costs
▪ Has shipping costs
▪ Relies on suppliers
▪ May have waste or spoilage
Which ratios should they watch?
▪ Assets include Goodwill
▪ Is valued on reputation
▪ Generally does not have
depreciation
▪ Human Resources are their
product
Which ratios should they watch?
Product Business Service Business

6. COMMON SIZE RATIO
You will need your P&L statement and
your Balance Sheet for these calculations

7. CURRENT RATIO
The current ratio shows
your present financial
strength. It represents
how your current assets
are compared to your
current liabilities. It is a
common measure of
risks for banks
considering your loan
request.

8. QUICK RATIO
Every business owner
must know if they have
enough money to pay
their business’s bills.
Basically, your assets
should be greater than
your liabilities. But,
knowing if you can pay
your bills is a little more
complex than seeing that
your total assets are
greater than your total
liabilities. That’s why you
should know how to
calculate the quick ratio.

9. INVENTORY TURNOVER RATIO
An inventory turnover ratio reveals the how frequently you convert
inventory into sales. It shows how much product is sold and how efficiently
you manage inventory. This greatly affects your liquidity.

10. DEBT TO WORTH RATIO
The debt-to-worth ratio shows how dependent
you are on borrowed finances compared to your
own funding. It compares how much you owe to
how much you own. If the debt-to-worth ratio is
greater than 1, your business has more capital
from lenders than you. If you are trying to get an
SBA loan, or any loan for that matter, the bank
might see this as a risk.

11. ROI – RETURN ON INVESTMENT
ROI compares the amount of money an investment brings into your
business to how much you paid for the investment. This ratio shows
the money you invest and the profit you get back from it.

12. SOURCES
https://www.patriotsoftware.com/accounti
ng/training/blog/6-financial-ratios-small-
business-owners-need-to-know/ - Amanda
Cameron February 18, 2016
Profit Mastery – Steve LeFever, MBA, CFE
Marketing Management, 15th edition -
Kotler