Revenues are probably your business's main source of cash. The quantity, quality and timing of revenues can determine long-term success. Revenue growth (revenue this period - revenue last period) ÷ revenue last period is important to track over a period of time. Revenue concentration (revenue from client ÷ total revenue) is also critical when determining concentration of customers. If a smaller concentration generates a high percentage of your revenues, you could face financial difficulty if that group changes purchasing habits. Revenue per employee (revenue ÷ average number of employees) is a ratio that measures your business's productivity. The higher the ratio, the better.
Profits reflect the businesses ability to produce quality product and service consistently. Gross profit margin (revenues – cost of goods sold) ÷ revenues. A healthy gross profit margin allows you to absorb shocks to revenues or cost of goods sold without losing the ability to pay for ongoing expenses. Operating profit margin (revenues – cost of goods sold – operating expenses) ÷ revenues. This determines your company’s ability to make a profit regardless of how you finance operations (debt or equity). The higher, the better. Net profit margin (revenues – cost of goods sold – operating expenses – all other expenses) ÷ revenues. This is what remains for reinvestment into your business profit share.
Operational efficiency measures how well you're using the company’s resources. A lack of operational efficiency leads to smaller profits and weaker growth. Inventory turnover (cost of goods sold ÷ average inventory). This measures how efficiently you manage inventory. A higher number is a good sign; a lower number means you either aren't selling well or are producing too much for your current level of sales. Accounts receivables turnover (net credit sales ÷ average accounts receivable). This measures how efficiently you manage the credit you extend to customers. A higher number means your company is managing credit well.
Capital efficiency and solvency are of interest to lenders and investors. Return on equity (net income ÷ shareholder’s equity). This represents the return investors are generating from your business. Debt to equity (debt ÷ equity). The definitions of debt and equity can vary, but generally this indicates how much leverage you're using to operate. Leverage should not exceed what's reasonable for your business.
Liquidity analysis addresses your ability to generate sufficient cash to cover cash expenses. No amount of revenue growth or profits can compensate for poor liquidity. Current ratio (current assets ÷ current liabilities). This measures your ability to pay off short-term obligations from cash and other current assets. A value less than 1 means your company doesn't have sufficient liquid resources to do this. A ratio above 2 is best. Interest coverage (earnings before interest and taxes ÷ interest expense). This measures your ability to pay interest expense from the cash you generate. A value less than 1.5 is cause for concern to lenders.