As a small business owner, you need to keep a close eye on your company’s financial department. Some of you might be managing the books on your own, while others have an in-house or outsourced bookkeeper.

Regardless of your situation, you need to learn how to interpret your finances. In addition to the essential financial reports for small business bookkeeping, there are certain formulas that every small business owner needs to know.

I created this guide as a reference or cheat sheet for you to use as a resource whenever you’re updating or analyzing your finances.

These formulas will give you a better understanding of the overall health of your small business or startup. This will help you make more informed decisions about your business.

Bookkeeping Formulas:

Accounting Equation
Assets = Liabilities + Equity

Net Income
Net Income = Revenue – Expenses

Break-Even Point
Fixed Costs ÷ (Sales Price per Unit – Variable Cost per Unit)

Cash Ratio
Cash Ratio = Cash ÷ Current Liabilities

Profit Margin
Profit Margin = Net Income ÷ Sales

Debt to Equity Ratio
Debt to Equity = Total Liabilities ÷ Total Equity

Cost of Goods Sold (COGS)
COGS = Inventory + Cost of Buying New Inventory -Ending Inventory

Retained Earnings
Retained Earnings = Beginning Retained Earnings + Net Income (or Loss) – Cash Dividends

Current Ratio
Current Ratio = Current Assets ÷ Current Liabilities

Gross Profit
Gross Profit = Sales – Cost of Goods Sold

Gross Profit Margin
Gross Profit Margin = Gross Profit ÷ Sales

Debt to Assets Ratio
Total Liabilities ÷ Total Assets

Return on Equity (ROE)
ROE = Net Income ÷ Average Owners Equity

Straight Line Depreciation
Annual Depreciation = (Asset Cost – Residual Value) ÷ Useful Life

Asset Turnover Ratio
Asset Turnover = Net Sales ÷ Average Property and Equipment Assets

Debt Service Coverage Ratio
Net Income ÷ Principal and Interest Payments on Loans

Revenue Per Employee
Revenue ÷ Number of Employees

Accrued Interest
Amount Owed on Payable × Annual Interest Rate × Fraction of Year Since Last Payment Date

Return on Assets
Return on Assets = Net Income ÷ Average Total Assets

Asset Turnover
Revenue ÷ Average Assets

Days Receivable
Days Receivable = 365 × (Accounts Receivable ÷ Annual Revenue)

Days Payable
Days Payable = 365 × (Accounts Payable ÷ Cost of Goods Sold)

Equity Multiplier
Equity Multiplier = Total Assets ÷ Total Equity

Degree of Financial Leverage
DFL = Percentage Change in EPS ÷ Percentage Change in EBIT

Return on Investment
ROI = (Value of Investment – Cost of Investment) ÷ Cost of Investment

That’s 25 bookkeeping formulas that every small business owner should keep as a reference.

While you should be able to understand your company’s finances, it doesn’t mean that you should do this alone. Managing your books can be quite challenging if you don’t have formal training. Consider using an outsourced bookkeeping service so you can focus your time on other areas of your business.