In business today, the use of business ratios has become widespread. This is because by using ratios to measure your operations you can gain important insights into your organizational performance.
Here at BusinessRatios.org we will be bringing you a complete guide to all the key business ratios and performance metrics.
Business Ratios – Getting a Better View of a Business’s Health
What are business ratios? They are tools that can help a
business person in evaluating the performance of their
business. They can help to detect problems before they
become full-blown disasters and can help an individual get a
better understanding of the financial health of their
business. Liquidity ratios can be used to measure whether or
not the business is going to be able to meet its short-term
obligations. This may involve comparing a business’s assets
to its liabilities. A business that does not have enough
assets to counterbalance its financial liabilities is not in
very good health financially.
Recognizing problem areas early is a key element in making necessary adjustments in time to avoid larger problems. A debt to equity ratio can help to determine the long-term debt versus the equity. A business with an unbalanced debt-to-equity ratio generally indicates the owner has financed the future growth of this company very aggressively. This can turn out to be a profitable gamble but the debt must be covered by future growth. Determining how effectively a business is at using its resources may involve an activity ratio. An activity ratio could include comparisons such as sales versus inventory. Determining the frequency of inventory turnover will give a clear indication of high sales.
Managing a business, regardless of its size, requires an individual to apply very focused attention to every detail. If the business owner uses an activity ratio and discovers that inventory turnover does not seem to reflect brisk sales, he or she may come to the conclusion that an excessive amount of inventory is being kept on hand. This information can provide a business owner with the knowledge that they need in order to make adjustments to keep a company running lean and strong. If, on the other hand, a business owner comes to the conclusion that inventory turnover is very high despite slow sales, he may realize that it would be more cost effective to keep more inventory on hand.
Business owners can use business ratios in a variety of forms to delve deeper into the records of the company in order to make more informed decisions. It is much easier to make adjustments before a problem gets out of control than it is to make corrections after-the-fact. Keeping a close eye on the financial well-being of the business can also help prevent a company from finding itself so far in debt that no amount of future growth can offset the interest costs of the debt.