Using business ratios can help you analyze the financial health of your business. You can use ratios to help compare your business against other businesses similar to yours, and to see how yours compares to the industry averages. By comparing your business, you can identify trends and make changes accordingly. Here are some of the components of ratio tracking, what they mean, and how they can help your business.
- Accounts Receivable Turnover: This ratio measures the promptness of customer payments. Higher numbers indicate the effectiveness of collection policies and procedures.
- Current Ratio: This ratio gives an indication of a company’s short-term debt paying ability. The higher the ratio, the greater the liquidity.
- Equity to Asset: A measure of financial position, this ratio measures the proportion of total assets financed by the owner’s equity. A higher ratio indicates better protection to company creditors, since more capital has been supplied by the owners and less by the creditors.
- Debt to Equity: Measures the extent the company is financed with money borrowed from non-owners. The higher the value of the ratio, the more total capital has been supplied by the creditors and less by the owners.
- Gross Profit Margin: This percentage measures profitability in terms of return per dollar of gross profit.
Stay tuned for the next post, which covers more ratios terms and what they mean!
One of the great benefits of accounting software is the ability to slice and dice your data so that it means something to you and your business. Well, consider ratio analysis an extension to your standard reports. Why? Because ratio analysis gives you information not found in your standard financial reports. It goes a step further by helping you pinpoint areas of strength and weakness in your business, so you can increase profits and reverse negative trends.
How do you stack up?
Ratio analysis allows you to make comparisons between your business and your competitors’. You can view standard industry trends, so you understand where your business stands in comparison. Once you know where you stand, you get an idea of which areas of your business to improve, giving you a distinct advantage over your competitors.
Just the facts, please.
It’s one thing to have ratio analysis data, and still another to understand where the numbers came from. Use your ratio analysis tool to generate the data, and then drill down further to understand exactly what makes up those numbers. This allows you to understand patterns within your business, so you can make better management decisions moving forward.
See the forest through the trees.
There is power in looking at details up close, but even more in being able to compare your data from two different time frames. Maybe last year wasn’t profitable and you want to turn it around. Or maybe you struggled last month and want to know why. Use ratio analysis as a high-level tool to see trends over longer periods of time, so you can achieve long-term financial growth.
By using ratio analysis, you can access information and trends that you may not have noticed, so you can make changes accordingly, which will benefit your business!