Top 3 Financial Ratios Every Business Owner Should Track for Success

If you’re like most business owners, your days are packed with running operations, managing staff, and delivering a great product or service. You’ve got the business basics down, but understanding your business’s financial health often gets overlooked. And trust me, that’s critical if you want long-term success.

One of the best ways to stay on top of your business’s financial health is by tracking a few key ratios. These numbers are like your financial GPS, guiding you toward growth and profitability.

Today, I’ll break down the top 3 financial ratios every business owner should know.

1. Current Ratio (The “Business BMI”)

You’ll find this ratio on your Balance Sheet. The current ratio shows whether your business can handle its short-term obligations (like paying vendors or payroll) using its short-term assets. It’s calculated by dividing your current assets by your current liabilities.

Why this matters: A ratio above 1.0 means your business has more current assets than current liabilities, which is where you want to be! I like to call this your “Business BMI.” Just like you track your physical health, this ratio helps you track your financial fitness.

Goal: Aim for a current ratio of 1.25:1 or higher. The higher the ratio, the bigger the cushion you have for covering surprise expenses—like that supplier who just had to send you an invoice 30 days early!

The real issue might be that your business is underfunded and needs additional working capital to sustain its growth.

Pro Tip: If your ratio is below 1.0, it’s a sign you might struggle to cover your short-term debts. Quick fix? Tighten up your accounts receivable (AR) process—getting paid faster will help. The root cause may be that you are underfunded and need additional working capital to support growth.

2. Gross Profit Margin (The Profit Powerhouse)

Your Gross Profit Margin is your true top-line number, not revenue. It measures how efficiently you’re turning revenue into profit. It’s calculated by subtracting the cost of goods sold (COGS) from your total revenue, and then dividing it by total revenue.

Why this matters: This ratio shows how much profit you’re making after covering direct costs. If your gross profit margin is low, it’s a sign that your pricing or production costs need attention. Remember, profitability isn’t just about how much you sell; it’s about how much you keep.

Goal: You should aim for a margin that allows you to comfortably cover operating expenses, reinvest in the business, and still have room for profit. Every industry is different, but even improving your margin by a few percentage points can significantly boost your bottom line.

Example: Imagine you’re a high-volume, low-margin business, like a gas station. You bring in $10 million in annual revenue, but with fuel costs at $8.8 million, your Gross Profit Margin (GPM) is 12%, leaving you $1.2 million to cover operating expenses, bills, and your own paycheck. Boosting this margin by just 2% would add an extra $200K directly to your bottom line!

Boosting your Gross Profit Margin by even a few percentage points can have a multiplier effect on your bottom line—far more impactful than saving $10 on copier paper.

Pro Tip: Review your pricing regularly, and don’t hesitate to make adjustments based on rising costs or market changes. Small tweaks in pricing or cost management can increase your gross profit margin by 5-10%, which has a multiplier effect on your bottom line. Just think of it as the “quick win” that keeps on giving!

3. Net Profit Margin (The Bottom Line)

Your Net Profit Margin shows how much profit your business keeps after all expenses, including taxes, interest, and debt payments. It’s calculated by dividing your net income (after taxes) by your total revenue.

Why this matters: While gross profit margin shows you how efficiently you operate, net profit margin tells you how much you’re pocketing. This is the real bottom line. After all, you’re in business to make money, not just to keep the lights on!

Goal: Aim for a net profit margin that allows you to pay off debt, reinvest, and grow. While every industry has its benchmarks, increasing this margin over time is a clear sign of a healthy business.

Example: Many business owners focus only on net profit in dollars, not as a percentage. The issue with the net profit figure on your P&L is that it usually doesn’t include principal debt payments or, in many cases, taxes. This means you’ll need to manually add those back to calculate your target profit margin—which should be higher than what your P&L shows.

The challenge with a P&L is that it's crafted by accountants, for accountants. Here’s how to make it work for you.

Pro Tip: If your net profit margin isn’t where you want it to be, review non-operating expenses like loan interest or tax payments. Sometimes, even small steps to reduce debt or improve tax efficiency can boost your net profit margin. Think of it as trimming the financial “fluff”—without sacrificing the core of your business.

Final Thoughts: Know Your Numbers, Grow Your Business

These ratios give you a quick snapshot of your business’s financial well-being. And here’s the best part: you don’t have to be a finance whiz to understand them! By tracking these numbers monthly, you’ll start spotting trends, avoiding surprises, and making more profitable decisions.

Remember, running a successful business isn’t just about making money—it’s about managing it well, too. If you’d like some help understanding these ratios or want to dive deeper, I’m here for you. With over 30 years of experience, I’ve helped business owners just like you take control of their numbers, reduce stress, and grow profits.

Let’s make your numbers work for you!

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Ready to take control of your cash flow and increase profitability? Join the Profit Accelerator Program today and start building a stronger financial future for your business.

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 I hope you found this helpful—and remember, the path to profitability doesn’t have to be complicated. You’ve got this!

Wishing you a great week ahead!

Patrick Shurney, MBA
Founder, 3P Consulting
📞 443.539.6276
🌐 www.3pcllc.com

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About Me:

As a veteran in financial coaching with over 30 years of corporate banking experience, my mission is to empower small business owners like you to become numbers confident, optimize cash flow, leverage debt, and pay yourself competitively.

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