As an entrepreneur you are going to either start a business or you are going to buy one. You will then need to know how to see how profitable your business is.
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Quick Ratio
This method shows if your business can grow or if it is going to drown in debt. A ratio above two is showing growth potential and below one tells us the business is on its way to destruction. To calculate this: Available cash + cash equivalents + short term investments + accounts receivable. Divide the answer by your current liabilities.
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Gross profit-
The closer the gross profit is to a 100% the better. Gross profit=sales – cost of Goods sold.
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Determine the value of the business
This is all your equipment, inventory etc. This is all found in the Balance sheet. If you are buying a business and their books are not up to date, be very very cautious.
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Revenue
Revenue is the crudest approximation of business worth. You must know that revenue is not profit. In business the only thing tat matters in the end is the profit.
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Discount cash flow analysis
Warren Buffet uses this one himself. It is a tedious formula to describe. The easiest way to do this is by using Excel’s NPV (Net Present Value) function. One way to quickly tell you is by dividing yearly earnings by the long term Treasury Bill Rate.
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Market Research
Do your market research. Determine the need for the business and get intel direct from your customers ( potential customers).
These 6 tips will help you analyze your current business and even your future ones. may you find plenty success.
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