Category: Small Business Assistance

Helping Employees Build Financial Security: A Guide to Employee Emergency Savings Accounts

As a small business owner, you have an opportunity to support your employees’ financial well-being in meaningful ways — and it doesn’t have to strain your budget. One increasingly popular option is offering an Employee Emergency Savings Account (ESA).

These accounts gained attention following the passage of the SECURE 2.0 Act in 2022, which updated retirement legislation and introduced Pension-Linked Emergency Savings Accounts (PLESAs).

PLESAs are simple to implement, require no employer contributions, and give employees a practical way to save for financial emergencies without tapping into their retirement funds.

What Is a Pension-Linked Emergency Savings Account (PLESA)?

A PLESA is a savings option tied to an existing retirement plan, such as a 401(k), allowing employees to automatically set aside money for emergencies via payroll deductions.

The key benefits include:

  1. Reduced employee financial stress
  2. Improved financial wellness
  3. Better employee retention and engagement

Employees can access these savings when unexpected expenses arise — without penalties or complicated processes.

Key Features and Requirements

Here’s a quick overview of how PLESAs work:

  1. Eligibility: Available to employees earning less than $160,000 in 2024 (classified as non-highly compensated for 2025).
  2. Contribution Limits: Maximum annual contribution is 3% of an employee’s pay, up to $2,500 per year.Contributions are made with after-tax dollars and held in a Roth IRA within the retirement plan.
  3. Withdrawals: Can be made at any time, penalty-free.
  4. Employer Contributions: Optional. If offered, employer matches must go into the employee’s main retirement account, not the PLESA.

Appropriate Uses for PLESA Funds

While there are no legal restrictions on how PLESA funds are used, the intended purpose is to help cover genuine financial emergencies, such as:

  • Medical bills
    • Car repairs
    • Emergency home repairs
    • Temporary loss of income
    • Essential living expenses during hardship

Employees should be encouraged to avoid using these funds for vacations, investments, or routine bills that should be part of a regular budget.

How to Set Up a PLESA for Your Business

If you’re interested in offering this valuable benefit, follow these steps:

  1. Confirm your retirement plan provider supports PLESAs. Contact your plan administrator to discuss setup, automatic enrollment, sub-account creation, and tracking procedures.
  2. Implement automatic enrollment, with an opt-out option.
  3. Clearly communicate program details to employees. Explain how it works, contribution limits, withdrawal procedures, and opt-in/opt-out options.
  4. Offer financial wellness education. Provide resources and workshops to help employees build money management skills.
  5. Track contributions and withdrawals for accurate reporting.

Final Thoughts

Providing your employees with tools for financial security is one of the most meaningful ways you can care for your team. Establishing a Pension-Linked Emergency Savings Account plan takes some effort but requires no employer funding — and the benefits to employee morale, wellness, and retention are significant.

If you have the means to offer a PLESA, I encourage you to explore it. Helping your team be financially prepared for life’s unexpected challenges isn’t just good for them — it’s good for your business too.

Motivate and Retain: How Incentives and Appreciation Build a Stronger Team

Your business is only as strong as the people behind it. Great employees drive growth, innovation, and profitability — and it’s essential to ensure your team feels valued and recognized. Two powerful tools for fostering this kind of positive workplace culture are incentives and appreciation.

Incentives vs. Appreciation

While often related, incentives and appreciation serve different purposes in the workplace:

  • Incentives are performance-based motivators. They encourage employees to meet specific goals by offering a reward when those goals are achieved.
  • Appreciation is an expression of thanks — recognizing and valuing your team’s efforts, regardless of outcomes.

The two often go hand in hand. For example, a sales team might be incentivized to reach a target by the promise of a bonus. When the goal is met, a manager can express sincere appreciation, publicly acknowledging the team’s hard work while announcing the earned incentive.

Designing Effective Incentives

Incentives can take many forms:

  • Financial: bonuses, raises, or gift cards
  • Non-financial: extra time off, public recognition, or professional development opportunities
  • Individual or team-based

For incentives to be effective, they should:

  • Be viewed as a bonus, not part of regular compensation
  • Be clearly defined and achievable
  • Offer a fair opportunity for all employees to succeed

A word of caution: poorly designed incentives can have unintended consequences. Team incentives may frustrate high performers if others aren’t contributing equally, and incentives that feel like withheld compensation rather than earned rewards can lower morale.

Showing Appreciation

Expressions of appreciation don’t have to be complicated or expensive — but they should always be sincere. From a simple “thank you” to larger gestures, showing gratitude goes a long way in building trust and loyalty.

A few ideas for meaningful appreciation:

  • Handwritten notes: A personal, sincere message highlighting specific ways an employee contributes to your business can make a lasting impact.
  • Celebrate birthdays: Even a simple greeting or card makes employees feel seen. Some companies offer a paid day off on an employee’s birthday — a small gesture that leaves a big impression.
  • Acknowledge work anniversaries: Especially for significant milestones like five, ten, or twenty years.
  • Company newsletters: Recognize employees who’ve accomplished milestones, earned certifications, or led successful projects.
  • Employee appreciation celebrations: Host an event, whether it’s a formal lunch with recognition and door prizes, or a casual morning with donuts and coffee. Add decorations to distinguish it from a routine meeting and make it feel special.

I recall a thoughtful gesture from my days as a teacher: our principal asked each of us for our favorite snacks and surprised us with them during workdays. At my current job, we once had an annual employee appreciation lunch — a tradition that was replaced by an appreciated paid day off. While we enjoyed the lunches, everyone agreed the day off was even better!

Final Thoughts

Balancing performance incentives with genuine, everyday appreciation creates a workplace culture where employees feel both motivated and respected. When people know their efforts are seen, valued, and rewarded, they’re more likely to stay engaged, loyal, and invested in your business’s success.

Growing from Within: How Developing Employees Strengthens Your Business

The labor market has eased a bit over the past few years; however, many small business owners still cite hiring and retaining qualified employees as a top concern. One effective way to address this challenge is to invest in developing your current team. When employees recognize that they have opportunities for growth and advancement, they’re much more likely to stay and build a long-term career with your company.

Why Develop Employees from Within?

When you help your employees grow and develop new skills, you reduce the risks associated with external hiring. These employees already understand your company’s culture, values, and expectations. You’re also familiar with their strengths and areas for improvement, making it easier to place them in roles where they can thrive.

Developing your team sends a strong message to your staff that you value them and are invested in their futures. Over time, this can lead to lower turnover rates, higher job satisfaction, and reduced HR costs. Plus, it ensures that valuable institutional knowledge stays within your organization.

How to Identify Employees with Growth Potential

A key part of employee development is identifying those who have both the desire and the potential to grow. Here are a few questions to help you spot employees who may be ready for advancement:

  • Does the employee take advantage of optional training opportunities?
  • Do they ask for feedback after completing assignments?
  • Are they willing to volunteer for projects that stretch their abilities?
  • Do they embrace challenges with a positive attitude?
  • Do they encourage and support their coworkers’ growth?

If the answer to most of these questions is yes, you may have a great candidate for further development.

Steps to Develop and Retain Quality Employees

Once you’ve identified potential leaders within your organization, consider the following steps to help them grow:

  1. Discuss Career Goals
    Have an honest conversation about their long-term goals and whether they see a future with your company.
  2. Outline Growth Paths
    Show them what different advancement paths might look like and what skills or assignments they’ll need to get there.
  3. Provide Learning Opportunities
    Offer on-the-job training, mentorship, classes, certifications, or cross-training in different departments.
  4. Set SMART Goals
    Help them create Specific, Measurable, Attainable, Relevant, and Time-bound goals that lead to expanded duties and promotions.
  5. Keep It Flexible
    Reassure employees that it’s okay to adjust their career path over time to better align with their skills and interests.
  6. Offer Consistent Feedback
    Regularly review their progress, offer constructive feedback, and ask how they feel about their growth and workload.

Final Thoughts

Retaining quality employees by providing opportunities for advancement is a win-win for both your team and your business. Employees feel valued, motivated, and loyal—and your business benefits from experienced, engaged staff.

Take a moment to reflect on your current employee development efforts and ask yourself, “How can we improve our processes to better support and retain top talent?” Small, intentional steps now can lead to stronger, more capable teams in the future.

Spring Cleaning Checklist for Small Business Owners

Spring is a season that naturally inspires us to declutter, deep clean, and get organized at home — and it’s a great time to do the same for your small business.

By the time spring rolls around, tax season is behind you, the days are getting longer, and the busy summer vacation months haven’t arrived yet. If this tends to be a slower season for your business, take advantage of it to freshen up your physical space, tidy up your records, and update your online presence.

Spring Clean Your Space

Start by walking through your business as a customer would. Enter through the front door and take a fresh, critical look at your surroundings. Ask yourself: Does this space feel clean, inviting, and up-to-date?

Here are some ideas to get started:

  • Clean your windows and doors — inside and out.
  • Sweep walkways and entry areas.
  • Replace burned-out light bulbs and check that all signage is clean and visible.
  • Declutter desks, counters, and waiting areas. Discard outdated magazines, brochures, and marketing materials.
  • Dust all surfaces, including shelves, windowsills, ceiling fans, and fixtures.
  • Remove or update seasonal décor and signage.
  • Reduce inventory by discounting or donating items that aren’t selling.
  • Organize and label storage bins.
  • Dispose of outdated equipment, like old printers and unused office supplies.
  • Deep clean restrooms and breakrooms.

A clean, organized environment makes a great first impression and boosts morale for your team.

Spring Clean Your Files and Records

An orderly business isn’t just about physical space — it includes your files, records, and systems, too.

Here’s a quick checklist:

  • Scan important tax documents and shred old paper copies.
  • Organize your digital files and delete what you no longer need.
  • Document your standard operating procedures (SOPs).
  • Close unused credit cards and bank accounts.
  • Update software and ensure your security systems are current.
  • Audit inventory and consider using inventory management software.
  • Back up critical data to the cloud or an external hard drive.
  • Review cybersecurity measures and update passwords.
  • Update your employee handbook to reflect any policy changes.

Keeping your records current and secure is essential for both day-to-day operations and long-term planning.

Spring Clean Your Marketing

Your online presence and marketing materials can get stale over time. A seasonal refresh ensures that your customers always see accurate, up-to-date information about your business.

To tidy up your marketing:

  • Check your online listings (Google, Yelp, Facebook, etc.) and verify that your address, hours, phone number, and email are current.
  • Update social media profiles with fresh content and accurate company details.
  • Clean up your client list by removing duplicates or inactive contacts.
  • Unsubscribe from newsletters and email lists you no longer find valuable.
  • Update your website with new photos, revised staff bios, fresh blog content, and a check to ensure all links are working properly.

A well-maintained online presence shows customers you’re engaged, professional, and paying attention to the details.

Final Thoughts

Taking time to “spring clean” your small business — physically, digitally, and online — will leave you better organized, more efficient, and prepared for the busy months ahead. A fresh, inviting business environment not only makes a great impression on customers but also boosts your own sense of confidence and control.

Do you have other business organizing or spring cleaning tips you use? I’d love to hear them — share your ideas in the comments!

The Power of 18 Minutes: How Small Daily Habits Fuel Business Growth

Being a business owner can feel overwhelming at times. There are constant demands for your attention, and the tasks you’d like to do to grow your business often take a back seat to the things you must do to keep the doors open.

Bills need to be paid, schedules made, inventory ordered, and payroll processed. Meanwhile, other valuable tasks—like updating your website, reaching out to potential clients, clearing out your inbox, developing new social media content, or reading a book to sharpen your skills—keep getting pushed to tomorrow.

Anders Ericsson popularized the Rule of 100, which says you can accomplish a great deal of learning, growth, and skill-building by consistently dedicating a small amount of time each day. Ericsson calculated that if you spent just 18 minutes per day on a task, it would add up to 100 hours in a year. The key is consistency.

Eighteen minutes is a small commitment. Most of us can find that many extra minutes in our day if we make it a priority. Here are a few suggestions to help you carve out those minutes:

  • Wake up 18 minutes earlier.
  • Take an 18-minute break mid-morning.
  • Dedicate a portion of your lunch hour.
  • Skip one half-hour television show.

Ways to Spend Your Extra 18 Minutes a Day

Read a business or financial book.
Depending on the titles you choose and your reading speed, you could finish 6–12 books a year by reading just 18 minutes a day.

Improve your social media content.
In 18 minutes, you can research trending topics and hashtags, write a quick post, respond to comments, and engage with followers and influencers.

Create a content calendar.
Spend one day a week using your 18 minutes to plan out your content calendar. In the beginning, you may need two days a week for this. As you get more efficient—or incorporate AI tools—you might only need one or two sessions per month.

Watch YouTube tutorials.
Many business-related videos are under 20 minutes and offer practical guidance on tools, software, or marketing tactics. (For example, I used YouTube to learn how to create newsletters in Mailchimp.) Just be careful to choose educational content over entertainment during this time.

Clean up your email inbox.
If you’re staring down hundreds (or thousands) of unread emails, it might take several 18-minute sessions to catch up. But once it’s under control, a session or two per month can keep it that way.

Make a networking call.
Reach out to a professional you’d like to partner with, follow up with a potential client, or reconnect with a former colleague. Plan what you want to say in advance and stay on task—most business calls last 5–15 minutes, so you can fit one or two into an 18-minute window.

Plan your day and set goals.
Many people find their most productive days start with a few minutes of intentional planning. Make a short list of what you need to accomplish and prioritize your top tasks. It helps you stay organized, focused, and less stressed.

Final Thoughts

Time is one of the most valuable resources a business owner has. By intentionally setting aside just a few minutes each day for the tasks that fuel your growth and sharpen your skills, you’ll start to see meaningful progress over time. Small, consistent actions can lead to big results—and it all starts with finding those 18 minutes.

How do you “find” extra minutes in your day?
How do you spend them?

I’d love to hear your strategies!

Preparing for a Business Loan: A Guide to Spreading the Numbers

When you apply for a business loan, your lender has a responsibility to the financial institution she represents to evaluate the risk of your loan request and make an informed decision. To do this, the lender will request your business tax returns, financial statements, and a personal financial statement. Then, she’ll likely tell you she needs time to “spread the numbers.”

So, what does that mean?

Spreading the numbers involves organizing the financial data you’ve provided into a standardized format, allowing the lender to assess your business’s financial health and loan eligibility. During this process, your lender will be looking at several key factors:

  • Trends in your business’s sales and profits
  • The risk involved in approving the loan
  • The overall health of your business
  • How your business compares to others in your industry

Your lender will also evaluate your application using what’s known as the Five C’s of Credit:

1. Capacity
Capacity refers to your business’s ability to generate enough earnings to cover all obligations and make the required loan payment. Lenders use the cash flow statement to determine this. Many financial institutions look for operating profits to be at least twice the debt service required for the loan.

2. Capital
Capital represents the assets your business owns, as shown on your balance sheet. A higher level of capital indicates a more stable and secure business. It can also serve as additional collateral for the loan, offering reassurance to the lender.

3. Collateral
Collateral consists of assets the business owns that could be sold, if necessary, to generate cash and cover loan payments in the event of declining revenues. This might include equipment, real estate, inventory, or other tangible assets.

4. Conditions
Conditions refer to the current state of the economy and trends within your specific industry. Lenders consider how these external factors might impact your business’s ability to repay the loan.

5. Character
Character is a measure of your personal reputation, creditworthiness, and reliability. Lenders evaluate character by reviewing your credit score, background, and history of financial responsibility. Issues like past bankruptcies or criminal convictions can be red flags and may affect your loan approval.

How to Make It Easier for Your Lender

As a borrower, you can help streamline the loan evaluation process by preparing a complete, organized, and accurate loan proposal package. Here’s how:

  • Provide a full set of financial statements, including: (1) three years of business tax returns, (2) the most recent balance sheet and income statement, (3) a year-to-date profit and loss statement, (4) a cash flow forecast, and (5) your personal financial statement
  • Ensure your financial statements are prepared using standard accounting formats. Many businesses rely on accounting software to generate standardized, professional reports.
  • Include written explanations for any significant events that have affected your business’s financial health or your personal financial position over the past year or two.
  • Carefully review your entire document package to confirm accuracy and completeness before submitting it to the lender.
  • Proactively disclose any potential red flags, such as prior bankruptcies or other character-related issues, to the lender upfront. Transparency builds trust and allows you to provide context before questions arise.

Final Thoughts

Most business owners want their loan applications to be processed quickly and smoothly. You can help make that happen by preparing your documents in advance and providing your lender with everything she needs to “spread the numbers” and make an informed decision. Thoughtful preparation not only speeds up the process but also positions you as a responsible, credible borrower.

If you’d like more guidance on understanding your financial reports, making informed business decisions, and evaluating your profitability, be sure to check out my other blogs for small business owners. Many of them are designed to help you gain confidence in reading your financial statements, spotting potential issues, and setting your business up for long-term success. You’ll find practical, straightforward tips you can start using today!

Is Your Business Healthy? Let the Numbers Tell the Story

Over the past few weeks, we’ve discussed how to create and understand your financial statements. Now it’s time to turn our attention to reviewing and assessing those statements.

Regularly analyzing your financial data is essential to:

  • Determine if your business plans are working
  • Identify problems such as theft or fraud
  • Evaluate how your business compares to others in your industry
  • Spot trends that may positively or negatively affect your revenue

Are Your Plans Working?

Your cash flow worksheet was based on projected monthly sales over two years. You made critical business decisions—such as hiring staff, leasing space, and applying for financing—based on those projections.

If your actual revenue is falling short of projections, you may be burning through cash faster than expected. Identifying that early allows you to make adjustments, cut expenses, or secure additional funding.

On the flip side, if your revenue is exceeding expectations, you might be struggling to meet demand or maintain excellent customer service. In that case, you may need to hire more staff or set clearer expectations with customers regarding delivery times.

Identifying Problems

When I owned a restaurant, we were required to complete a weekly profit and loss statement and submit it to headquarters along with our royalty payment. Two numbers I always paid close attention to were payroll and cost of goods sold (COGS).

Our goal was to keep payroll under 22% of revenue and COGS under 35%. If either number was too high, it triggered an investigation. Here are some examples:

Payroll Red Flags

  • Overstaffing during slow periods: I reviewed scheduling during off-peak hours and made necessary adjustments.
  • Employees clocking in early or out late: I compared timecards to the schedule. One student used to come in early to do homework, but I didn’t realize he was on the clock!
  • Overtime pay: This often happened when a nearly full-time employee picked up extra shifts. We learned to ask part-time staff to cover instead.

Inventory Red Flags

  • Improper food preparation: Mistakes led to waste. We retrained employees or reminded them to follow special instructions more carefully.
  • Excess food on the buffet: Supervisors learned to reduce what was put out in the last 30 minutes of service.
  • Ordering errors: Overstocked perishables spoiled; running out meant buying from local stores at higher prices.
  • Theft: This included employees eating food without paying, giving away food, or failing to ring up sales and pocketing the cash.

Even if you’re not in the food service business, these examples illustrate how to track down the causes of higher-than-expected costs.

Comparing to Industry Standards

Analyzing your financial statements also helps you understand how your business stacks up against others in your industry. Industry benchmarks are available through association data, IBISWorld reports, and other sources.

For more on this, check out my blog: Comparing Your Financial Ratios to Industry Standards – Susan’s Reflections

Spotting Financial Trends That Spell Trouble

Declining sales volume is a major red flag. A brief dip might be seasonal or due to temporary competition. But if the trend continues, take a closer look:

  • Customer service issues: Even one rude or careless employee can cost you business. Many customers won’t complain—they’ll just leave.
  • Product quality issues: Poor-quality goods can lead to returns and dissatisfied customers.
  • Missed deadlines: Late deliveries frustrate clients. Evaluate every step in your supply chain to find and fix delays.

Rising accounts receivable can signal that your customers are struggling to pay. This slows your collections, reduces cash flow, and makes it harder to pay your own suppliers. If your receivables are growing:

  • Identify which customers are paying late and ask why.
  • Consider adjusting their credit limits or payment terms.
  • Project your cash flow for the next few months.
  • Talk to your banker about a line of credit, and ask suppliers for more favorable terms if needed.

Declining profit margins are another warning sign. Investigate the root cause. It could be:

  • Rising supply costs: Due to inflation, fuel prices, or shortages. Consider discontinuing low-margin items or sourcing more affordable alternatives.
  • Increased wages: If labor costs have risen, look for ways to improve productivity or automate processes.
  • Higher operating expenses: These might include utilities, insurance, or telecom services. Shop around for better rates, reduce waste (like leaking pipes or lights left on), and review whether you’re paying for services you don’t need.

Final Thoughts

Every business is different, but all must control costs and protect profit margins. Assessing your financial ratios regularly helps you identify problems early—before they impact your bottom line. Use the examples above as a guide to evaluate your own financials, make informed decisions, and position your business for long-term success.

If you’d like help reviewing your financial statements or identifying potential issues, don’t hesitate to reach out. I’m here to support you! You can email me at susan.ball5@aol.com.

Comparing Your Financial Ratios to Industry Standards

Business woman studying her business's financial ratios

Knowing your financial ratios is critical to managing your small business successfully. If you are applying for a business loan, the lender will want to see that your net operating income is more than sufficient to cover your loan payments. In fact, most lenders expect net operating income to be approximately three times the required loan payment. This standard holds true across the industry.

However, other ratios can vary greatly depending on the type of business you have. For example, inventory turnover should be much faster in a restaurant or grocery store compared to a retail clothing or appliance store. Grocery stores often have low profit margins per item but sell a large volume of products, while appliance stores sell fewer items but need a higher margin per sale to stay profitable.

Fortunately, there are several sources of standard industry data that can help you assess how your business compares to industry averages. These resources include:

  • IBISWorld: Offers comprehensive industry analysis, financial statistics, and industry trends. It’s a fee-based service, but you may be able to access it for free through a university or public library. Many Small Business Development Centers (SBDCs) use these reports in client consultations.
  • ReadyRatios: This financial software allows business owners to input their financial statements and automatically calculate key financial ratios. It also compares your business’s performance to industry benchmarks. ReadyRatios offers both free and fee-based versions depending on your needs.
  • Statista: A platform providing a wide range of data, including industry-standard ratios, market trends, and consumer behavior. It also has both free and premium options.

Other sources include:

  • Trade Associations
  • U.S. Census Bureau
  • Bureau of Labor Statistics
  • Market Research Firms

Key Ratios to Compare

There are several important financial ratios you can use to assess your business’s performance. Here are a few to consider:

Revenue Growth

If your industry is experiencing strong revenue growth but your business is lagging behind, it’s important to investigate why. Ask yourself:

  • Are new competitors eating into your market share?
  • Have you cut back on marketing and advertising?
  • Are you failing to provide an exceptional customer experience?

Profit Margin

Before starting your business, you should research the industry’s standard profit margin and compare it to your projected margins. If you’re projecting a profit margin much higher than industry standards, you’ll want to carefully review your assumptions about costs and operating expenses. If your business is already running and your profit margin is too low, consider:

  • Are your costs rising faster than you’re able to increase prices?
  • Are you failing to collect receivables in a timely manner?
  • Have revenues fallen below the point where they can cover fixed costs?
  • Has the quality of your product declined, leading to returns and waste?

Cost of Goods Sold (COGS)

The COGS ratio varies widely by industry, and yours should align with the industry’s average. If it’s not, investigate the following:

  • Are your prices too high, leading to reduced sales?
  • Is your markup too low, cutting into profits unnecessarily?
  • Are you offering deep discounts to move inventory, suggesting a misalignment with customer demand?
  • Are you over-ordering perishable items, resulting in waste?

Inventory Turnover Ratio

Your inventory turnover ratio indicates how quickly you’re selling and replacing inventory. If your ratio is higher than the industry average, it may indicate that you’re turning over inventory too quickly, which could lead to lost sales on high-demand items. On the other hand, a lower turnover ratio could mean that you’re ordering too much or the wrong items. Striking the right balance between inventory levels and demand is key to boosting sales and minimizing excess investment.

Interpreting Industry Benchmarks

These are just a few of the key financial ratios you can compare. It’s important to remember that deviating from the industry standard doesn’t necessarily indicate a problem, but it should prompt further investigation. You may find that your business is more efficient than average, or you may uncover areas for improvement that could help you optimize operations and boost profitability.

Conclusion: Understanding Your Ratios in Context

By comparing your financial ratios to industry standards, you can gain valuable insights into how your business is performing. Regularly reviewing these ratios will help you stay on track, identify potential issues early, and make informed decisions about the future of your business. Industry benchmarks serve as a useful tool, but remember that each business is unique, and your financial strategy should reflect your individual goals and circumstances.

If you need help analyzing your business’s financial ratios or understanding how they compare to industry standards, feel free to reach out. I’m here to help you navigate your financial strategy and grow your business confidently! You can email me @ susan.ball5@aol.com

Know Your Financial Ratios: The Key to Understanding Your Business’s Profitability

Understanding your financial statements is crucial to managing your small business effectively. However, it’s just as important to analyze these statements to assess how your business is performing. One powerful tool to do this is financial ratios. These ratios can help you measure your business’s financial health and compare it to others in your industry.

Here’s an overview of key financial ratios every business owner should understand and know how to calculate.

What Are Financial Ratios?

Financial ratios are calculations that help business owners evaluate their financial performance. They allow you to measure things like liquidity, profitability, and leverage—giving you a clearer picture of your business’s financial health.

Measures of Liquidity:

Liquidity refers to how easily assets can be converted into cash to cover short-term obligations. To maintain financial stability, it’s essential for a business to have sufficient liquidity.

Current Ratio: The current ratio measures a company’s ability to meet short-term liabilities using short-term assets.

Formula: Current Ratio = Current Assets / Current Liabilities

A ratio greater than 1 indicates that the company can pay its short-term obligations using its assets. A higher ratio means more liquidity.

Quick Ratio: The quick ratio is another liquidity measure, but it excludes inventory from current assets, recognizing that inventory may take longer to sell and convert into cash.

Formula: Quick Ratio = (Current Assets – Inventory) / Current Liabilities

Inventory Turnover Ratio: This ratio measures how often a company sells and replaces its inventory during a period. A higher turnover suggests that inventory is being sold quickly. Inventory turnover ratios vary greatly from one industry to another. Businesses whose inventory is perishable must turn over their inventory in a few days, whereas businesses whose products have long lives turn over their inventory just a few times a year.

Formula: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Measures of Profitability:

Gross Profit: Gross profit represents the revenue that remains after subtracting the cost of goods sold (COGS). It’s essential for understanding how much revenue is available to cover operating expenses.

Formula: Gross Profit = Revenues – Cost of Goods Sold

Gross Profit Margin: The gross profit margin shows the percentage of revenue available to cover operating expenses.

Formula: Gross Profit Margin = (Revenues – COGS) / Revenues

A higher gross profit margin indicates a more efficient business model.

Net Profit: Net profit is the remaining revenue after subtracting all expenses, taxes, and interest. It represents the business’s overall profitability.

Formula: Net Profit = Revenues – COGS – All Business Expenses

Net Profit Margin: The net profit margin calculates what percentage of revenue remains as profit after all expenses are paid.

Formula: Net Profit Margin = Net Profit / Revenues

Operating Profit (EBITDA): After taking out the cost of goods sold and paying all operating expenses you are left with the Operating Profit. It measures the funds available to meet obligations, such as loan payments and taxes. It’s also known as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Formula: Operating Profit = EBITDA = Gross Profit – Operating Expenses

Return on Assets (ROA): The return on assets ratio measures how efficiently a business is using its assets to generate profit.

Formula: Return on Assets = Net Profit / Total Assets

Return on Equity (ROE): The return on equity ratio shows how much profit a company generates with the money invested by its shareholders.

Formula: Return on Equity (ROE) = Net Profit / Shareholder’s Equity

Leverage Ratios:

Leverage ratios indicate the degree to which a company is financing its operations through debt, which is vital for evaluating financial risk.

Debt-to-Equity Ratio: The debt-to-equity ratio compares a company’s total debt to its total equity.

Formula: Debt-to-Equity Ratio = Total Debt / Total Equity

Interest Coverage Ratio: The interest coverage ratio measures a company’s ability to meet interest payments.

Formula: Interest Coverage Ratio = EBIT / Interest Expense

Debt Service Coverage Ratio: This ratio measures a business’s ability to cover its debt obligations (principal and interest payments).

Formula: Debt Service Coverage Ratio = Net Operating Income / (Principal + Interest Due)

A ratio of 2.5 to 3.0 or higher is often seen as a healthy benchmark by lenders.

How to Interpret Financial Ratios

Now that you understand the basic financial ratios, it’s essential to interpret what they mean. Some ratios, such as the debt service coverage ratio, are fairly standard across industries. Other ratios, such as inventory turnover or profit margins, can vary significantly between different industries.

In our next blog post, we’ll dive deeper into how to access industry data to benchmark your ratios and what variances in your ratios mean for your business’s performance.

Conclusion: Why Financial Ratios Matter

Understanding and calculating financial ratios is crucial for small business owners who want to assess their financial health. These ratios provide valuable insights into liquidity, profitability, and financial risk. By regularly tracking these ratios, you can make informed decisions about your business’s financial strategy and growth.

If you have any questions about how to calculate or interpret your business’s financial ratios, feel free to reach out in the comments below or email me at susan.ball5@aol.com. I’m here to help you manage your business finances with confidence!

Know Your Financial Statements—The Personal Financial Statement

The Personal Financial Statement (PFS) is an important document that every business owner should understand. Unlike other financial statements, the PFS reflects the financial health of the business owner rather than the business itself. Many business owners mistakenly believe their personal financial situation is separate from their business’s financial health. However, that is not the case.

A business owner’s personal finances play a crucial role in determining whether a lender will approve a small business loan. Lenders review the PFS to assess if the borrower:

  1. Is managing their personal finances well
  2. Has cash to inject into the business
  3. Has collateral to support the loan

Moreover, landlords and franchisors often require business owners to demonstrate financial responsibility before entering into lease or franchise agreements. Additionally, a PFS is necessary for certain SBA certifications and for securing SBA-backed loans.

Many business owners struggle with understanding how to complete the PFS. To help, I’ll guide you through the process, using the SBA’s Form 413 as the reference. While each bank may have its own version, most will accept the SBA version.

Guidelines for Completing the Personal Financial Statement

Assets:

  • Cash on Hand and in Banks: Total cash on hand and in your bank checking accounts.
  • Savings Accounts: Total of savings accounts, including CDs and money market accounts.
  • Retirement Accounts (IRAs, etc.): Total all retirement accounts. Though this money cannot be used as collateral, it’s still an important asset.
  • Accounts and Notes Receivable: Money owed to you, such as tax refunds, security deposits, or maturing CDs.
  • Life Insurance: Include only the cash surrender value of life insurance policies (the amount you’d receive if you cancel the policy, after administrative costs).
  • Stocks, Bonds, Real Estate, Automobiles, and Other Personal Property: List at current market values.
  • Other Property and Assets: Includes boats, trailers, collectibles, and jewelry.
  • Business Ownership: If you own a business, include its value, calculated by summing cash, equipment, and inventory. Enter this as “Other Assets.”

Liabilities:

  • Accounts Payable and Notes Payable: Includes unpaid bills, outstanding credit card balances, and bank loans (excluding mortgages, student loans, and auto loans).
  • Auto and Installment Loans: Include the total debt and the monthly payment for auto loans, student loans, or other installment loans.
  • Life Insurance Loans: If applicable, list any loans against life insurance policies.
  • Mortgage Liabilities: Include the total debt secured by any real estate, including first and second mortgages and home equity loans.
  • Unpaid Taxes: List any unpaid income tax, property taxes, and personal property taxes.
  • Other Liabilities: Include private loans from friends or family, legal judgments, and unpaid child support or alimony.

Net Worth: Net Worth = Total Assets – Total Liabilities

Additional Sections to Complete

Once you’ve filled in the basic table, additional details about your assets and liabilities are required in the sections below.

Section 1: Income

  • Salary: Include wages or salaries you regularly pay yourself from the business and any other employment.
  • Investment and Real Estate Income: Provide details of income from investments or properties.
  • Other Income: This might include disability income, foster care payments, and retirement income (but not alimony or child support).
  • Contingent Liabilities: Include any loans for which you co-signed, or set-aside funds for contingencies like lawsuits or IRS audits.

Section 2: Loans and Credit Cards

Provide details on all outstanding bank loans, credit card balances, student loans, auto loans, and personal loans.

Section 3: Stocks and Bonds

Provide details on stocks and bonds owned, including the number of shares and their current values.

Section 4: Real Estate

Include all properties owned—both free and clear, and those with mortgages. Use online sources like Zillow to estimate current property values.

Section 5: Other Assets

Describe the assets listed in Accounts Receivable, Other Personal Property, and Other Assets. Include the asset and its value, e.g., “2024 tax refund expected: $1,450” or “2018 fishing boat: $9,000.”

Section 6: Taxes Owed

Provide details on any unpaid taxes owed to the federal, state, or local government. If you’re on a payment plan, include the balance and payment terms.

Section 7: Other Liabilities

Provide details on any other liabilities not already covered in the previous sections.

Section 8: Life Insurance Policies

List the face value of your life insurance policies and the cash value you would receive if you cashed them out. If you’ve borrowed against any policies, include those details here as well.

Be sure to sign and date the form, and include your Social Security Number. If you are married, your spouse must also sign and date the form.

When lenders, landlords, or franchisors review your PFS, they’re evaluating whether you manage your personal finances responsibly, if you’ve taken on too much debt, and whether you can meet your financial obligations. Managing your personal finances well is critical, not only for your own peace of mind but also to demonstrate your ability to manage your business effectively.

Conclusion

The Personal Financial Statement is a key tool in securing financing for your business and demonstrating your financial responsibility to potential partners. By completing it accurately, you’ll be better prepared for any financial assessments that come your way. If you have any questions about how to complete your PFS or need further assistance, feel free to drop a comment below or email me at susan.ball5@aol.com! I’m happy to help you navigate this important aspect of your business finances.