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Financial Ratios: Ways To Evaluate The Performance Of Your Business

Occasions encourage companies to make a thorough review of their financial structure: an expansion project, insufficient cash reserves or increased spending. You can also make such a review if you need to borrow more frequently as your revenue increases or if a customer wants to place a large order with a longer period for payment than that offered normally.

A careful review of your financial ratios is a way to evaluate your financial health and find out how it could be improved. These ratios are used to make comparisons between different aspects of the performance of a business or to determine how the company ranks within an industry or region. They reveal the fundamental indexes, for example, if you have taken too much debt, accumulated too much inventory or if you do not cover your accounts quickly enough.

However, the ratios should not be evaluated only at the time of a visit to your banker. Ideally, you should review your ratios each month to monitor trends within your company. Although different terms are used for different ratios, they are divided into 4 main categories.

Liquidity Ratios

They measure the amount of cash (cash and easily convertible assets) you have to respect your commitments and give an overview of your financial health.

The Efficiency Ratios

Often calculated for a period of 3 to 5 years, these ratios provide additional information on certain aspects of your business, such as the collection of accounts receivable, cash flow and results of operations.

Profitability Ratios

These ratios are not only used to assess the financial viability of your business, but they are essential to compare your company to others operating in the same sector. You can also set the trends for your business by comparing these ratios over a number of years.

Leverage Ratios

These ratios give an idea of the long-term solvency of a company and indicate how it uses the long-term debt to finance its operations.

Debt ratios (relative to equity or assets) are used by bankers to see how your assets are financed, either by creditors or your own investment, for example. Generally, a bank will perform a low ratio as an indicator of your ability to repay your debts or any further borrowing to seize new opportunities as they arise.

Access And Calculation Of Ratios

To determine your ratios, you can use various online tools, such as the ratio calculators BDC, although it is possible that your financial adviser, accountant, and banker already have most of the commonly used ratios.

You can also acquire representative data by industry from various sources, in print or online, including Dun & Bradstreet’s Industry Norms and Key Business Ratios, the Annual Statement Studies RMA (English) and Statistics Canada (looking indicators financial performance of Canadian companies). The benchmarking for Industry Canada’s SME offers basic financial ratios by industry tool, based on the profiles of small businesses Statistics Canada. Visit Pre Construction Condos in Toronto if you are looking to invest.

Interpretation Of Your Ratios

The ratios vary by industry and time. Their interpretation requires knowledge of your business, your industry and the causes of fluctuations.

In this regard, the BDC’s consultants offer advice that will help you interpret and improve your financial performance.

Beyond The Numbers

It is important to keep in mind that ratios are only one way to determine your financial performance. In addition to the same sector as a business where it is located may also be a factor. Regional differences in factors such as labor or shipping costs may also affect the value and meaning of a ratio. Solid financial analysis always includes careful consideration of the data used to establish ratios and an assessment of the circumstances in which the results were obtained.