Better analysis of your business
Financial ratios help businesses analyse their performance. Specifically they can be used to evaluate profitability and viability, trends in your cashflow, liquidity, tracking performance against other businesses in your specific industry or market and spotting trouble within your business.
Ratios can be super helpful when it comes to presenting your business’ performance to lenders or stakeholders especially when it comes to seeking funding for a loan from a bank or investor.
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What is a financial ratio?
A financial ratio is a measure of two or more components of a business’ financial statements.
They give businesses the ability to capture data in a straightforward way.
Ratios that measure liquidity
Current Ratio measures a business’ ability to pay short term obligations, which are those payable within a year. It is calculated by dividing total current assets by total current liabilities.
Current Ratio = Current Liabilities / Current Assets
Average Debtor Days Ratio
Average debtor days is a ratio that measures how quickly a business collects cash from its customers.
Average Debtor DaysRatio = Net Credit Sales / Average Trade Debtors
How to apply financial ratios
These ratios make it easy to access insightful data about your business or company. They can be used for more than just securing funding, they are great for providing KPI’s (key performance indicators) and helping guide and bring clarity to decision making. Integrating ratios with your accounting software also means there’s less room for human error and can bring automation to the process of analysing and comparing.
We hope that this information simplifies your process of understanding your business finances. If you need help getting your head around business ratios, feel free to get in touch.