July 26, 2022
Strategic decision-making in business relies on relevant information about the business. Business and industrial financial ratios provide a way for businesses to examine financial performance to make real-time decisions that optimize them for profitability.
The knowledge of financial ratios is beneficial to every entrepreneur that seeks growth and profitability; it’s an integral part of basic finance for entrepreneurs. This article discusses financial ratios entrepreneurs need to know.
Financial ratios are fundamental tools for many players in the finance world, including founders, startups, small and medium business owners, accountants, IT specialists, and business analysts. Here are some key benefits of people needing financial ratios to founders.
Financial ratios can help a company to know its position in the market. By comparing its business’s financial performance with competitors, founders can identify gaps. This discovery enables the company to take a strategic stand to optimize financial management and improve profitability.
Especially for startups, inefficient use of assets puts the business at risk of death. Financial ratios reveal operational cost management to enable a company to achieve operational efficiency, which stresses lower costs for maximum profitability. Essentially, business owners can know how financial resources are utilized to eliminate unnecessary expenses.
Financial statements show financial trends over a reporting period which can be a tool for effective performance forecasts. Financial ratios can also help businesses identify potential financial crises and take strategic actions ahead of time.
Financial ratios are crucial for determining a business’s financial health. Some key financial ratios for startups and companies at other stages include:
Leverage ratios measure a company’s debt level relative to the business’s equity. A high liquidity ratio indicates a high risk of bankruptcy for a business. The two primary liquidity ratios include:
Liquidity ratios measure a business’s ability to pay its debt obligations and its margin of safety. The financial leverage ratio indicates a company’s ability to use its current assets to cover its current liabilities.
Profitability ratios measure a company’s overall profitability, taking both direct and indirect costs into account. A high ratio indicates a positive return.
Asset management ratios measure management efficiency by comparing operating expenses to net sales.
As an entrepreneur, it’s important to track your business’s financial performance, and that’s a primary reason to learn about financial ratios. Analyzing your business financial situation is easier when you use a cheat sheet that contains all the key financial ratios. Better still, reach out to accountero to help you manage your business finance professionally. With dashboards ‘built-for-founders,’ on the accountero platform, it’s easy to monitor your business growth. Talk to us to get started and let us help you excel on your entrepreneurial journey.