Understand the ratios your business needs for success

Unless you try, you can't succeed in business, no matter how musically Frank Loesser weighed in on the matter. So how will you know if you're really successful? Entrepreneur magazine suggests that businesses must benchmark against the rest in the industry. Metrics like net profit, liquidity and turnover ratios are some of the key measurements for business success.

Keep up with the small business

There are many ways you can check the data a small business owner needs to see if the business is performing well. Entrepreneur states that the sources are not that costly. A small company owner can find benchmarking data in three ways:

1. Get to know business owners and associations. If you reach out to owners of companies that are similar to yours - however outside your market area, so that competition isn't an issue - you might be able to share financial data. Similarly, joining industry groups that conduct anonymous financial polls can give you a general idea of how your industry is faring.

2. Find industry directories. Just like Chain Store Guide, growth figures are broken down.

3. Put the money into industry research. It could be worth it. Depending on the study being done, this can be inexpensive or very expensive. Sometimes you may be able to glean some free stats from a press release about a study. There are several companies like Sageworks. They have plenty of data for you to use.

Figuring out which industry study to use

Sageworks explains that it is very important to have relevant reports. This will give you the most out of what you pay for. Probably the most current information helps business owners understand what they must do now, and data gleaned via a focused view of a specific business field provides probably the most applicable solutions to overcoming barriers to business success.

Sageworks CEO Brian Hamilton suggests business owners pay close attention to these financial metrics in an industry study:

Net profit before taxes margin

This is supposed to be over a period of time and should be a before-tax net profit. It needs to be divided by sales. This accounts for cents in profit for every dollar received in revenue. That is the basic way of putting it. It is better if the number is higher.

There are ratios to look at

Two ratios are significant here: current ratio and quick ratio. The quick ratio is assets divided by liabilities, and it is a good, long-term metric. You can get the current ratio by adding the cash and accounts receivable. Then you divide that by liabilities there. This is a short term measure. It is very important too.

Rate of turnover

Turnover ratios measures how well a business manages and moves its inventory in terms of liquidity. The three most significant turnover ratios for business owners are accounts receivable turnover, accounts payable days and inventory days ratio. The turnover for accounts receivable is very important. It measures the number of days needed to turn any receivables into cash. The ration for accounts payable is also necessary. This is the numbers of day a business takes to pay vendors the money. The number of days needed to sell inventory is shown in the inventory day's ratio. Do you need help calculating the ratios? About.com Business Finance and Sageworks' website can both help.

Articles cited

Business Finance

bizfinance.about.com/od/financialratios/f/Inventory_Turnover_Ratio.htm

Chain Store Guide

chainstoreguide.com/

Entrepreneur

entrepreneur.com/blog/219546

Sageworks

sageworksinc.com/datareleases.aspx?article=36

Stories are human glue for businesses

youtube.com/watch?v=FllC83wHN-g