Useful Financial Ratios to Track Business Performance

Understanding your business’s financial health isn’t just about checking your bank balance – it requires analyzing key financial ratios that provide insights into profitability, efficiency, and overall stability.

By regularly tracking these ratios in QuickBooks Online (QBO), business owners can make informed decisions, identify financial risks, and plan for growth. In this post, we’ll cover:

• Why financial ratios matter

• The most useful ratios for small businesses

• How to track them using QBO reports

Why Financial Ratios Matter

Financial ratios help you:

• Assess profitability – Are you making enough money?

• Manage cash flow – Do you have enough liquidity to cover expenses?

• Optimize efficiency – Are you using resources wisely?

• Ensure financial stability – Can your business survive downturns?

These insights help you stay proactive rather than waiting until financial problems arise.

Key Financial Ratios for Small Businesses

1️⃣ Gross Profit Margin – Measures profitability before operating expenses

Formula:

(Revenue – Cost of Goods Sold) ÷ Revenue

Why it matters:
Shows how much profit remains after covering direct costs. A declining margin may indicate rising costs or pricing issues.

📌 QBO Report to Use: Profit & Loss Statement → Check "Total Revenue" and "Cost of Goods Sold"

2️⃣ Net Profit Margin – The bottom-line profitability ratio

Formula:

Net Profit ÷ Revenue

Why it matters:
Indicates how much of every dollar earned turns into profit after all expenses. A low margin could mean high operating costs or inefficient spending.

📌 QBO Report to Use: Profit & Loss Statement → Check “Net Income” and “Total Revenue”

3️⃣ Current Ratio – Measures short-term financial health

Formula:

Current Assets ÷ Current Liabilities

Why it matters:
A ratio above 1.0 means you have enough assets to cover short-term debts. A ratio below 1.0 could indicate liquidity problems.

📌 QBO Report to Use: Balance Sheet → Check “Total Current Assets” and “Total Current Liabilities”

4️⃣ Accounts Receivable Turnover – Shows how quickly you collect payments

Formula:

Total Sales on Credit ÷ Average Accounts Receivable

Why it matters:
A low turnover means customers are slow to pay, potentially leading to cash flow issues.

📌 QBO Report to Use: Accounts Receivable Aging Report

5️⃣ Debt-to-Equity Ratio – Measures financial leverage

Formula:

Total Liabilities ÷ Total Equity

Why it matters:
A high ratio means your business relies heavily on debt rather than owner investment. A very high ratio can be a risk indicator for lenders.

📌 QBO Report to Use: Balance Sheet → Compare “Total Liabilities” and “Total Equity”

6️⃣ Inventory Turnover – Measures how efficiently inventory is managed

Formula:

Cost of Goods Sold ÷ Average Inventory

Why it matters:
A high turnover means strong sales, while a low turnover suggests overstocking or weak demand.

📌 QBO Report to Use: Inventory Valuation Summary

7️⃣ Operating Cash Flow Ratio – Indicates cash flow health

Formula:

Operating Cash Flow ÷ Current Liabilities

Why it matters:
Shows if you have enough cash to cover short-term obligations.

📌 QBO Report to Use: Statement of Cash Flows

How to Track These Ratios in QuickBooks Online

QBO provides several built-in reports to help monitor these ratios:

✔ Profit & Loss Report – Tracks revenue, expenses, and net profit.
✔ Balance Sheet – Shows assets, liabilities, and owner’s equity.
✔ Accounts Receivable Aging Report – Helps track outstanding invoices.
✔ Cash Flow Statement – Gives insight into your liquidity.

💡 Tip: Save these reports as custom reports in QBO for easy access and regular monitoring.

How We Can Help

Tracking these financial ratios can help your business stay profitable and financially stable. However, incorrect bookkeeping can skew your numbers, leading to misleading financial insights. Our team can help you set up and customize these reports in QuickBooks Online, ensuring they’re accurate, relevant, and ready whenever you need them.

📩 Need help keeping your finances on track? Contact us today!