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The untrained business person would state "You should close your business when you stop creating profit." That is incorrect, you should instead stop your business when the marginal cost exceeds the marginal revenue. In layman terms, when the total cost of the business including time spent exceeds the total revenue. There are indicators that can help you access your current situation and determine if your business is starting to cost more than it is making.

1.If your current ratio is over less than one. The equation for current ratio is Current Assets/Current Liabilities. It measures whether or not a firm has enough resources to pay its debts over the next 12 months. If your current ratio is less than one, than you do not have enough assets to pay its debt over the next 12 months.
2.Inventory turnover rate is decreasing. The equation for inventory turnover rate is Cost of goods sold/Average inventory. It tells you how often your inventory is being replaced with new goods. If your turnover rate is decreasing than goods are being purchased less.
3.Your working capital is your current assets minus your correct liabilities. If you're working capital is decreasing then your liabilities are increasing, your assets are decreasing or both. Either way it indicates how your business is doing financially.

The above are just three indicators economists use to assess and business. If you are truly interested on how your business is doing than I highly recommend you seek professional help in the matter. But remember; close your business when the marginal cost exceeds the marginal revenue. Just because you are not making profit does not mean the best idea is to quit.

Learn more about this author, Ben Butty.
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