How is that new side hustle really going? Figuring out your debt-to-asset ratio is the best way to find out. And to show lenders or investors how well you’re handling your finances.
Okay, how do I calculate my debt-to-asset ratio?
Start with your balance sheet (aka your company’s financial statement). Then follow these three steps:
Add up your liabilities (what you owe others).
Add up your assets (everything your business owns, including what others owe you).
Divide your total liabilities by your total assets.
Here’s what the math looks like:
Debt-to-Assets Ratio = Total Liabilities/Total Assets = __
Got it. And what’s a good debt-to-asset ratio?
Less than 1 is a great goal. Because if your debt-to-asset ratio is higher than that, it means you have more liabilities than assets. For example: A 78 debt-to-asset ratio total means creditors have provided 78 cents of every dollar of your assets.
Why do I need to know my debt-to-asset ratio?
Because it impacts how much you can borrow from lenders. A high ratio may cause lenders to view your business as high risk, which can lower your approval odds. Kinda like a low credit score.
How can I lower my business’s debt-to-asset ratio?
If you aren’t happy with your current debt-to-asset ratio, all hope isn’t lost. One of the easiest ways to get it under control is to increase your revenue. Think: raise those prices. You can also focus on reducing inventory. Are you hanging on to too many items? If so, you’re probably overspending.
Financial health is important for any business, no matter how small. Tracking your debt-to-asset ratio keeps you in the know. And on your lender’s good side.