Lender and investors are able to glean a lot of valuable information from the data available in a company's' financial statements and records. Their priority is insuring that they are repaid for any loan or financial investment. Anyone contributing to your company financially wants to know:
- How much of your business you really own
- Whether there is enough ready cash on hand
- What is the status of current liabilities?
- Are profits reaching their potential?
Certain financial ratios provide a wealth of information on the health of your business and answer the questions outlined above. There are many ratios that may be applied to assist in a lending or investing decision the following are some very key ratios a business owner should be aware of:
Lenders are particularly interested in liquidity which reveals the ability to pay bills and the availability of ready cash. They use a calculation called the Current Ratio.
Current Ratio = Current Assets / Current Liabilities
A 2 to 1 ratio is generally acceptable although acceptability may vary per industry.
Before loaning or investing, a financial entity may review a company's level of ownership and compare that with claims due to creditors. To check this aspect of your finances, they use a calculation called the Worth to Dept Ratio.
Worth to Debt Ratio = Net Worth / Total Debt
Lender and investors are most assuredly interested in a company's profitability since that is a good measure of ability to repay financial assistance. To measure this aspect they employ a calculation called the Net Profit on Sales Ratio.
Net Profit on Sales = Net Profit / Net Sales