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Today’s issue of Commerce Chronicles is brought to you by Stay.ai - the world's best subscription software. Tenzo made the switch to Stay and is thrilled with our reduced churn and all Sub metrics improved.

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• 26% reduction in active churn

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Back to the newsletter. 🤩

Building Strength. Financial Ratios (Pt. 2)

Welcome back to our series on financial ratios! (Click here for Part 1) In the last newsletter, we delved into how ratios are important to make decisions within your company. We discussed the Marketing Efficiency Ratio (MER) and how it can provide valuable insights into the efficiency of your marketing spend relative to your revenue. Today, we're going to explore three more critical financial ratios: Debt Ratio, Current Ratio, and the newly minted “Page Inventory Ratio.” Understanding and optimizing these ratios can significantly enhance the financial strength of your business. Please reach out anytime if you have specific questions - I am always happy to help.

1. Debt Ratio

The Debt Ratio is a measure of the extent to which a company is financed by debt. It’s calculated as:

This ratio helps you understand the proportion of your company's assets that are financed by debt. A high debt ratio indicates that a large portion of your assets is funded by debt, which can be risky, especially if your cash flow is inconsistent.

For instance, if your total liabilities are $500,000 and your total assets are $1,000,000, your debt ratio is 0.5 (or 50%). This means that half of your assets are financed by debt. A lower debt ratio is generally preferable, as it indicates a lower financial risk.

The best companies have very little debt, and if they do, it’s always at great terms (low interest, easy to pay off).

2. Current Ratio

The Current Ratio measures your company's ability to pay off its short-term liabilities with its short-term assets. It's calculated as:

This ratio is crucial for assessing your company's liquidity. A current ratio below 1 suggests that your company may have trouble meeting its short-term obligations. Conversely, a ratio above 1 indicates that your company has more than enough assets to cover its short-term liabilities. You want this number to be high!

For example, if you have $200,000 in current assets and $100,000 in current liabilities, your current ratio is 2.0. This indicates a strong liquidity position, suggesting that your business is well-equipped to handle short-term financial obligations.

Note that in the example above “2.0” is not a very strong current ratio. You want significantly more assets. Think “war chest” of capital.

3. The “Page Inventory Ratio”

This is a ratio that we invented in my company, Tenzo. For context, for the first several years of the company, we operated on a net loss. Then, for several years, we switched to breakeven, and in the last 18 months, we’ve shifted into quite profitable territory.

Since we operate an inventory-based business, we have used lines of credit to finance this inventory. Now that we’re profitable, we are transitioning the payment of inventory to our own cashflows.

The Page Inventory Ratio tracks how our inventory is financed. It’s calculated as follows:

“Total Inventory Paid in Cash / Total Inventory Balance”

For example, let’s say we have $100 in total Inventory. We used our financing company for $90, and we used our own cash for $10.

We would have a Page Inventory Ratio of ($10/$100) or .1 (10%).

This would not be very good! Remember, great companies finance all operations through their capital, and therefore, you want this ratio to be at 1 (100%).

Final Thoughts

By keeping a close eye on these financial ratios or inventing your own, you can gain a clearer picture of your company's financial health and make strong decisions to strengthen your business. Remember, each ratio provides a different perspective, and together they offer a comprehensive view of your financial stability and growth potential.

In the upcoming newsletters, we will continue building financial strength together! 💪

Here are the best things I read, watched, or listened to last week.

• Book Rec: Meditations by Marcus Aurelius

• 150+ Shopify Updates

• Digital Punch Cards are here. Game changer for brands!

• The problem with over-purchasing.

• Hot Product news. 🔥

Coming soon 🔥⬇️🏀 (click for magic)

Peace out 👋

Steve

Founder Tenzo & Commerce Chronicles

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