The financial ratios every small business should track

Revenue tells you how much came in. Profit tells you what was left. But neither tells you whether your business is actually healthy — whether it can pay its bills next month, whether it's getting more efficient or less, and whether its debt is a tool or a trap. For that, you need ratios.

The good news: you don't need an MBA or a spreadsheet that takes a week to maintain. A handful of ratios, tracked consistently, will tell you almost everything. Here are the ones that matter, grouped the way HealthGauge scores them.

Liquidity: can you cover the short term?

Liquidity ratios answer a simple question — if bills came due now, could you pay them?

• Current ratio = current assets ÷ current liabilities. Above ~1.5 is comfortable for most small businesses; below 1.2 is worth watching; below 1.0 means current obligations exceed current assets.
• Quick ratio strips out inventory (which can be hard to convert to cash fast). A quick ratio near or above 1.0 means you can cover short-term liabilities without selling inventory.
• Cash ratio is the most conservative — just cash ÷ current liabilities.

A business can be profitable on paper and still fail because it ran out of cash. Liquidity is the canary.

Profitability: are you actually making money?

• Gross margin = (revenue − COGS) ÷ revenue. This is your pricing-and-production health.
• Operating margin adds operating expenses, showing whether the core business is profitable before financing and taxes.
• Net margin is the bottom line as a percent of revenue.
• Return on assets (ROA) = net income ÷ total assets — how efficiently your asset base generates profit.

Watch the trend as much as the level. A gross margin sliding from 41% to 37% over a few quarters is a quiet warning that costs are creeping or pricing is slipping.

Efficiency: how well do you use what you have?

• Days sales outstanding (DSO) — average days to collect receivables. Rising DSO means cash is stuck in customers' hands.
• Days payable outstanding (DPO) — average days you take to pay suppliers. Moderate is healthiest; too short leaves cash on the table, too long can signal strain.
• Inventory days — how long inventory sits before selling.
• Cash conversion cycle (CCC) = DSO + inventory days − DPO. It's the number of days your cash is tied up in operations. Lower is better; negative is excellent.
• Asset turnover = revenue ÷ total assets.

Efficiency ratios are where small operational habits — invoicing promptly, negotiating terms, managing stock — show up in the numbers.

Leverage: how much risk is in your structure?

• Debt-to-equity = total liabilities ÷ total equity. Some leverage is healthy; a lot is risky.
• Debt-to-assets = total liabilities ÷ total assets — the share of your assets financed by debt.
• Interest coverage = operating income ÷ interest expense — how comfortably you can service your debt.

Don't track them in isolation

The mistake most owners make is looking at one number once. The value comes from (1) tracking the same ratios every period, (2) comparing each to a sensible healthy band, and (3) watching which are deteriorating. That's exactly what a health score does: it rolls every ratio into category sub-scores and a single number, so you can see at a glance whether things are getting better or worse.

HealthGauge computes all of these automatically from your QuickBooks Online data and flags the two or three metrics most worth your attention. See a live example or start free.