Essential Business Formulas
Looking for Business Plan Software? Check out Business Plan Success
If you are new to the business world, then you are probably also new to business ratios and formulas. These are calculations that are used to measure the effectiveness, efficiency, profitability, etc. of your business and will be very helpful when writing your business plan. Often, a percentage or ratio is much more revealing than a dollar figure for determining the direction your business is going. Here are some of the most commonly used ratios and what they measure.
Liquidity Ratios
Liquidity measures the ability for a company to turn its assets into cash. These are especially important to creditors because they demonstrate how easily you can pay your bills. There are two liquidity ratios, the current ratio and the quick ratio, or acid test.
Current Ratio
The current ratio measures the ratio of current assets to current liabilities. A current asset is an asset that can be quickly turned into cash, such as inventory or accounts receivable. A current liability is a debt that you will be paying within the next year. This ratio shows the ability of your company to pay off its debts over the next year.
Formula: [Current Assets / Current Liabilities] or [(Inventory + Accounts Receivable + Cash Equivalents + Cash) / (Accruals + Accounts Payable + Notes Payable)]
Quick Ratio or Acid Test
The quick ratio, like the current ratio, measures the ability of your company to pay off its debt. The difference is that inventory is not included as a current asset. Because turning your inventory into cash is contingent on sales, the quick ratio shows the ability of your company to pay its debts if you were not able to sell your inventory. If your current ratio is steady and your quick ratio is declining, you may be building up too much inventory.
Formula: [(Cash + Accounts Receivable) / Current Liabilities] or [(Cash + Cash Equivalents + Accounts Receivable) (Accruals + Accounts Payable + Notes Payable)]
Continue to Efficiency RatiosBusiness Plan Success automatically calculates the most common business ratios & formulas for analysis in your business plan.
Find out more about how Business Plan Success can create your business plan financial statements.
More Articles in this Category:
Return to the Article Library
>> Learn how Business Plan Success can help you write a professional business plan.
