Small Business Ratios: The Terms to Know

In the next week, I'm preparing to write about some of the most important terms to know when it comes to small business ratios. In preparing for this, I thought that it would be important to consider the terms to know for that article. Consider this post a glossary for what you'll read next week. Today, we will talk about the terms and what they mean.  Between Thursday of this week and Friday of next week, we will talk all about why these terms matter. So let's get started!

Cash Flow

We at ProStrategix have spoken a lot about cash flow before. At the end of the day, cash flow is an understandable concern for small businesses of every size. But it is okay to admit that "cash flow" as a concept is hard to understand.

While I don't usually like to quote wholesale from other people's work, the definition written by Nick Zarzycki on bench.co in their article "What is Cash Flow and How Can You Effectively Manage It?" is a great explanation:

Cash flow is a measurement of the amount of cash that comes into and out of your business in a particular period of time. When you have positive cash flow, you have more cash coming into your business than you have leaving it's so you can pay your bills, and cover other expenses. When you have negative cash flow, you can't afford to make those payments. The concept of having "enough money to meet your financial obligations" is also known as working capital.

Liquidity

Liquidity is a harder concept to understand, but it is so important for small businesses trying to stay afloat.

According to Freshbooks's article "Liquidity in Small Business," you can achieve liquidity.

[L]iquidity is the ability of the current assets to meet the current liabilities. It is the number of liquid assets of a business that can be traded in the market without losing its value.

If this sounds like too much for yourself, liquid assets are anything you can currently use without incurring a penalty. It is important for any business currently trying to stay afloat.

Quick or Current Ratios

Are calculated using this formula

Key Takeaways

If there are two ratios that will tell you if your business is on fire, these are the two

1. Cash is King: If you don't have enough cash or ways to get cash quickly to cover your bills/debts, you are, at least on paper, bankrupt
2. Quick Ratio: This will tell you if you are not generating enough cash to cover the bills that are coming due.

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