5 Balance Sheet Ratios Every Small Business Owner Needs to Track

As a small business owner, you probably spend most of your time looking at your profit & loss (income statement). It makes sense — it shows sales, expenses, and profit. But if you’re only checking the P&L, you’re missing half the story.

Why Your Balance Sheet Matters

Your balance sheet is where the hidden truths live. It shows what you own, what you owe, and what’s left over. And when you use a few simple ratios, you can turn your balance sheet into a powerful decision-making tool.

Here are five ratios that reveal the story behind your numbers:

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1. Current Ratio → Can I pay my bills?

Formula: Current Assets ÷ Current Liabilities

This ratio tells you whether you can cover what’s due in the next 12 months.

• Over 1 = You have more assets than short-term debts (a good sign).
  
• Under 1 = You may struggle to meet upcoming obligations.
  

Why it matters: If your current ratio is slipping, it’s a red flag that cash flow may get tight soon.

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2. Quick Ratio → Am I cash-ready?

Formula: (Cash + Accounts Receivable) ÷ Current Liabilities

This version of the current ratio removes inventory and focuses on your most liquid assets.

• For product-based businesses, it’s especially useful if inventory moves slowly.
  
• For service-based businesses, it still applies — it shows whether cash and client payments coming in are enough to cover short-term bills.
  
• In both cases, it answers: Could I pay tomorrow’s bills without relying on selling more products or services first?
  

Why it matters: This ratio is like your “rainy day check” — are you covered if things get tough?

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3. Debt-to-Equity Ratio → How risky is my growth?

Formula: Total Liabilities ÷ Owner’s Equity

This tells you how much of your business is financed with debt versus your own investment.

• A higher ratio means you’re leaning more on borrowed money.
  
• A lower ratio means you’re relying more on your own capital.
  

Why it matters: Debt isn’t always bad — but knowing how leveraged you are helps you decide if it’s time to borrow more or slow down.

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4. Working Capital → Do I have breathing room?

Formula: Current Assets – Current Liabilities

This simple number shows how much you have left after covering short-term obligations.

• Positive working capital = room to grow or handle surprises.
  
• Negative working capital = potential cash crunch ahead.
  

Why it matters: Lenders often look at this to see if you can manage short-term debt responsibly.

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5. Return on Assets → Am I making the most of what I own?

Formula: Net Income ÷ Total Assets

This ratio shows how efficiently your business uses its assets to generate profit.

• Higher = you’re getting more bang for your buck.
  
• Lower = your resources may not be working as hard as they could.
  

 Why it matters: It helps you evaluate whether that equipment, building, or software is truly paying off.

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The Bigger Picture

On their own, each of these ratios tells you something important. Together, they give you a clearer picture of your business health than your income statement ever could.

Think of them as quick “vitals” for your company — like blood pressure or heart rate at the doctor’s office. They don’t tell the whole story, but they alert you to what’s strong and what needs attention.

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The Bottom Line

The balance sheet doesn’t have to be intimidating. With just a handful of ratios, you can spot risks, measure growth, and make smarter decisions for your business.

At Lookout Bookkeeping, we help small business owners go beyond the numbers and uncover the story their financials are telling. If you’d like help setting up a simple system to track these ratios every month, we’d love to connect. Check us out on our website: www.lktbook.com

Be sure to grab our freebie, 10 Ways to Keep More Money as a Business Owner. Because as I always say, you started a business to make money.