Important Financial Ratios for a Healthy Business

Businesses can’t catch a cold….. can they?

In order for us to perform at our best, we have to maintain our bodies. This usually means making informed choices about what we eat (Isn’t it handy that most menus now show the caloric content of our favorite dish? 😟😅), getting adequate exercise, fighting the urge to stay up too late to watch that final episode, and limiting unnecessary stress- like not being prepared for tax season. 

You can’t expect your body to function properly, much less optimally, if you don’t give it proper nutrition or spend all day, every day, curled up on the couch watching reruns (plus, like anything, it loses its luster if you do it ALL the time).

While your business can’t get sick in the traditional sense, maintaining balance is essential to keep your business surviving. Really though, we want your business to be thriving!

So, what does the doctor prescribe for a healthy business? Fortunately, no marathons or even 5K’s necessary here!  What you need are healthy ratios!

How much should I reinvest in my business?

Every business needs continued investing, especially a growing one! Just as your total expenses will fluctuate during the year, the amount you reinvest will change throughout the lifespan of your business. Staying on track is important though, and I’d like to share some guidelines to help you do just that.

Ideally, your operating expenses should reflect around 30% of your total income. Your expenses will fluctuate somewhat throughout the year, and if you’re in a growth stage, they may be closer to 50%. However, even with reinvesting, your expenses should stay below 50% for sole proprietors and LLC’s, otherwise you are cutting into your profits. 

If your business only profits, say, 10% of total income, that’s not a very healthy business. (After all, your business is meant to bring you profit- and you need enough to live off of!) If you keep your operating expenses around 30%, you will still have 20% of “expenses” to contribute towards growth and investments, while steering clear of the 50% mark- which will undoubtedly give your business the flu, so to speak. 

Be sure to check out my IG post, How can I tell if it's a business expense? for more details on what constitutes a business expense, and what doesn’t.

What should I be paying myself?

In a perfect world, we all eat our veggies, get plenty of exercise and 100% of the income from our business goes straight into our well lined pockets. 

Here in the real world, things work a little differently. I’m not here to discuss how many miles you run (or don’t) and whether you prefer a side of grilled asparagus or smothered french fries, I am here to help you navigate towards a healthy payday though!

I previously highlighted the importance of reinvesting in your business, but you still need (and deserve!) a payday. So, how much should you pay yourself (a.k.a. take as a profit)?

Again, it all comes down to simple math. If your expenses are higher, you guessed it, your profits are lower. Ultimately, paying yourself 50% of your total income in profits is optimal. 

If you’re an LLC, this is all yours to keep! (Remember, you will claim it.) .S-Corps that issue payroll to their owners will assess this a little differently.

If you are a single member LLC with no employees or contractors and are paying yourself below 30%, you most likely have an expense problem. Remember, overspending is the #1 way you can affect your own profitability!

Am I forgetting something?

Remember, Uncle Sam is going to want his cut. Don’t forget that 20% of your total income will end up as taxes. This is relatively static, assuming your expenses stay in the 30-50% range. However, your expense and profit percentages are directly dependent on each other. Higher expenses will almost always mean less money in your pocket and vice versa.

If you're staring at your Profit and Loss thinking, “My numbers are nowhere near these!” it's okay, these are guidelines to building a sustainable, healthy business. Make small adjustments in your budgeting to ensure your business is aiming to reach these percentages each month.

I’m going to go for a run now, or maybe have a bowl of ice cream. 

Either way, I recommend you grab your latest Profit and Loss Statement and do a health check on your business!

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