Business ratios help to measure business performance. Performance assessment is a huge part of growing a business. Periodically, it is important to assess how far the business is growing or otherwise, particularly in relation to the benchmarks you set or as compared with previous reports. One way to easily assess comparative growth on a company’s financial performance is through ratio analysis. It is a quantitative tool used to assess one’s business in the areas of liquidity, efficiency, profitability, debt, and more.

Just as these ratios are useful for auditors, investors, and banks who want to assess companies’ actual performance for various reasons, they’re also a useful tool for small business owners who can make decisions and birth effective strategies. They can help you keep track of your business’s growth and provide you with insights that will prove useful for advancing your small business in the long run.

What are Business/ Financial Ratios?
Business ratios are also referred to as financial ratios. They are tools that help convert raw numbers into useful information, and they help you manage your business better and more conveniently. Business ratios help you analyse seemingly inconsequential numbers and help you read between the lines to get insight.

They are a type of key performance indicator (KPI). There are several other KPIs to track, but financial ratios are mostly concerned with information found on your financial statements.

Here are some important business ratios to guide the financial performance of your SME:

Gross Margin Ratio
Gross Margin Ratio = Gross Profit (Sales – Cost of Goods Sold) ÷ Total Sales.

This ratio will prove even more important for businesses that sell products. It helps you keep stock of how much money you have to cover your operations after paying for the products you sell. You can either measure your gross margin ratio by product or in total for your business. The idea is that if your direct cost or cost of goods sold is low, you’ll end up having more income to cover other necessary expenses.

Net Profit Margin
Net Profit Margin = (Total Revenue – Total Expenses) ÷ Total Revenue.

Your net profit margin refers to the percentage of your remaining revenue after all operating expenses, interest, and taxes have been deducted. Net profit margin is an important ratio because it shows how effective your company is in managing costs and turning your revenue into profits.

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