Sometimes we get so caught up with a specific thought that we lose the bigger picture. This is especially evident in today’s competitive business environment, where owners have become increasingly dialed-in on the Xs and Os of their company’s finances. Just as important as how much you focus, however, is what you are actually focusing on. When it comes to the financial health of your business, there are certain performance indicators which stand out more than others.
We see these as two of the most important:
Debt To Equity Ratio
One of the top metrics that indicates a healthy business is your debt to equity ratio. Basically, this statistic measures the number of liabilities your business currently has, and compares them to the overall assets your business has as equity. It’s a great way to understand the impact that shareholder investments may be making on your bottom line, and allows decision makers to take a closer look at financial accountability. By showing the debt that the business has accrued and dividing it by value, you’re essentially finding the net worth of your company, and identifying how profitable it is.
Accounts Payable Turnover
Accounts payable turnover is all about understanding the direction that your business is going. What it measures is the rate at which your business pays off its suppliers. This is calculated by dividing total sales costs for a given period by the average accounts payable listed for the same stretch of time. In the end, you get a small snapshot of data. At face value, it may not seem like much. If you plot everything over time, however, you paint a really accurate picture of how long it takes for your business to pay off its suppliers. If you see the accounts payable turnover declining over a few months, it could be a warning sign that your business is falling behind on cash flow.
We know the numbers speak for themselves, but acknowledge that it takes a seasoned professional to fully understand what they mean. If you’d like to take a deeper dive into the financial performance indicators for your business, speak with one of our experts. For more information on other financial topics, check out our blog.