Financial ratios that show success
Your monthly business financial statements provide information about previous months' activities, but even if the statements look good, you can still bet more out of them.
Many business owners rely on monthly financial statements plus monthly financial ratios. Ratios can be prepared from information already in your accounting software. Following are tools for measuring particular aspects of your business:
Liquidity:
- Current ratio - current assets over current liabilities.
- Receivables turnover - how quickly customers pay.
- Inventory turnover - how long your inventory sits.
Profitability:
- Profit margin - profit generated by sales.
- Asset turnover - sales generated by assets.
- Return on assets - profit generated by assets.
Solvency:
- Debt to total assets - percent of assets owned by creditors.
- Interest coverage ratio - ability to pay interest.
- Cash debt coverage ratio - ability to pay long-term debt.
Program your accounting system to produce key accounting ratios, review them monthly and get new insight on your business.
