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.
Assets = Liabilities + Equity
Net Income = Revenue – Expenses
Fixed Costs ÷ (Sales Price per Unit – Variable Cost per Unit)
Cash Ratio = Cash ÷ Current Liabilities
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 = Beginning Retained Earnings + Net Income (or Loss) – Cash Dividends
Current Ratio = Current Assets ÷ Current Liabilities
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
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
Revenue ÷ Average Assets
Days Receivable = 365 × (Accounts Receivable ÷ Annual Revenue)
Days Payable = 365 × (Accounts Payable ÷ Cost of Goods Sold)
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.