Debt-to-Sales Ratio: Calculate and Improve It

Are you a business owner who borrowed money to start or grow your company? Your debt-to-sales ratio matters more than you think.

Understanding this metric helps you guide your business toward long-term financial success. You can make smarter decisions about loans and operations.

Struggling With Business Debt Collectors?

Don't let high debt-to-sales ratios derail your business. Our partner Solo helps you negotiate with collectors and settle business debts for less than you owe.

Negotiate Your Debt

We’ll explain what a debt-to-sales ratio is and how to manage it effectively.

What Is a Debt-to-Sales Ratio?

A debt-to-sales ratio compares your company’s total annual debts to its total annual sales. You express it as a percentage.

Investors and analysts use this metric to evaluate your company’s financial health. It shows how well you can service debts and pay creditors.

Businesses often take on debt to cover startup costs or expand operations. You hire employees, purchase equipment, or invest in growth opportunities.

The goal? Generate enough profit to pay off your loans over time.

Don’t confuse this with “bad debt to sales ratio.” That’s a different accounting measure for uncollectable customer accounts.

How to Calculate Your Debt-to-Sales Ratio

The formula is simple. Divide your total annual debt by your total annual sales.

Here’s an example. Your debt this year was $75,000 and you made $150,000 in sales. Your debt-to-sales ratio equals 50%.

You can use this calculation to track financial health over time. Compare your performance to industry averages.

The ratio helps you identify opportunities to take on strategic debt. You can also evaluate your overall risk profile more accurately.

What’s Considered a Healthy Ratio?

No single number defines “healthy” for every business. Your company size, business model, and profit margins all matter.

Industry trends affect your ratio too. During a recession, consumers spend less and your sales drop.

Macroeconomic factors beyond your control create variability. Long-term debt also skews your ratio higher initially.

Use your debt-to-sales ratio alongside other financial metrics. Track it over time to establish a baseline for your specific situation.

High Ratios Signal Risk

A high debt-to-sales ratio worries creditors and investors. It suggests you’re overleveraged and financially vulnerable.

If economic conditions shift or sales decline, you risk defaulting on loans. Lenders become reluctant to approve new financing.

Low Ratios Show Strength

A low debt-to-sales ratio demonstrates financial self-sufficiency. You generate enough cash to cover debts comfortably.

Creditors view you as a safer bet for lending. You have more flexibility to invest in growth opportunities.

How to Improve Your Debt-to-Sales Ratio

Two strategies work: increase sales or reduce debt. Ideally, you pursue both simultaneously.

Increase Your Sales Revenue

Making more sales improves your ability to pay off debts. Your ratio improves from the bottom up.

Specific tactics depend on your business type and industry. B2B companies need different strategies than B2C businesses.

If you’re just starting out, establish a sales pipeline first. You need repeatable procedures that create consistency.

A structured sales process makes scaling easier. Each customer receives the same quality experience.

Pay Down Your Debt

Reducing debt improves your ratio from the top down. You have several options available.

Pay off loans early when possible. Refinance existing debt at lower interest rates.

If you face sudden financial difficulties, contact your lender. Renegotiate loan terms to buy time for recovery.

Consider working with our partner Solo to negotiate and settle business debts effectively.

Why This Metric Matters for Your Business

Your debt-to-sales ratio reveals your company’s financial vulnerability. Lenders review it before approving new loans.

A high ratio can block access to capital when you need it most. You might miss growth opportunities or struggle during downturns.

Monitor this metric regularly as part of your financial planning. Take action before your ratio becomes problematic.

Combine debt reduction strategies with revenue growth initiatives. Balance short-term needs with long-term sustainability.

If you’re overwhelmed by business debt, our partner Solo can help you respond to collectors and negotiate settlements.

Frequently Asked Questions

What is a debt-to-sales ratio?

A debt-to-sales ratio is a percentage that compares your company's total annual debts to its total annual sales. It measures your business's ability to generate revenue to cover debts and indicates financial health to lenders and investors.

How do I calculate my business's debt-to-sales ratio?

Divide your total annual debt by your total annual sales. For example, if you have $75,000 in debt and $150,000 in sales, your debt-to-sales ratio is 50% ($75,000 ÷ $150,000 = 0.50 or 50%).

What is considered a healthy debt-to-sales ratio?

There's no universal standard since it varies by industry, business size, and economic conditions. Track your ratio over time to establish a baseline for your specific situation. Generally, lower ratios indicate better financial health and make lenders more willing to extend credit.

Can I improve my debt-to-sales ratio quickly?

You can improve your ratio by increasing sales revenue or paying down debt. Quick improvements depend on your cash flow situation. Consider refinancing debt at lower rates or renegotiating loan terms with lenders to provide immediate relief.

How does debt-to-sales ratio differ from bad debt to sales ratio?

Debt-to-sales ratio measures your company's total debt compared to sales revenue. Bad debt to sales ratio is an accounting measure of uncollectable customer accounts that must be written off as expenses. These are completely different financial metrics.

What Is a Debt-to-Sales Ratio? A Guide for Business Owners