As entrepreneurs, yos should know how to do a Balance Sheet analysis using KPIs as it can help you to gain valuable insights about the health of your business. Today I shall be sharing some simple KPI as well as their importance;

1. Working Capital Ratio or Current Ratio: compares your Current Assets to your Current Liabilities

Formula: Current Assets / Current Liability

Importance: A good indicator of potential short-term cash flow problems.

Note:

1. A value of less than 1: means you have more current liabilities than assets which also means that potentially you’ll have problems paying your bills on time.
2. A high ratio, say 5 or 6, isn’t necessarily a good thing either. That would depend on what the current assets were made up of.
3. It’s healthy to have a good cash reserve but just putting it in bank/FD maybe a waste. Think of potential investment (Trust or low risk appetite or shares/margins/futures for high risk appetite) **
4. if it’s mostly made up of inventory, it could indicate that you’re holding too much stock    or
5. if your current assets are mostly in Receivables, it could indicate that you’re not collecting payments efficiently.
6. If your current ratio is high & the reason is due to 2 (II) or 2 (III), as business owner you need to have plans on how to quickly reduce that balances as 2 (II) would have holding costs (warehouse rentals etc) or it could become obselete (expired, outdated or better still, it could hold a party for Tom  & Jerry!!). As for 2(III) it could turn into bad debts where all your profits got eaten by this debtor!

** BE MINDFUL when  doing investments. There are ALWAYS chances of investment failures.

The next sharing shall be on Average Debtor Days