• New Wave Accountants

What You Need To Know When It Comes to Financial Ratios

The success of any business in terms of the finance side cannot be qualified by mere insights, observations and the like. There needs to be a solid basis for that, which is through numbers. One way to accurately assess and measure the financial health of your company is through financial ratios.


What Are Financial Ratios?


In its textbook definition, financial ratios are a set of calculations that is also referred to as accounting ratios. The performance of a business is converted into set values through its financial data. Assessments made through this include, but are not limited to:


  • Efficiency

  • Finance

  • Liquidity

  • Profitability

  • Sales


Financial ratios are vital for comparing data side by side. It’s used when comparing your business’s numbers with your competitors’ as well as the performance of other entities in the field. As mentioned, measuring the financial health of your business should rely on cold, hard data. These data include investments, challenges and trends that you could use to further the financial side of things.


Most Widely Used Financial Ratios


There are a lot of financial ratios used, depending on many factors. Let's look at some of the most widely used ones below:


Accounts Receivable Turnover Ratio


This ratio is all about whether or not a business is on track when it comes to collecting dues. If it's high, that's a good sign; if it's low, there's an obvious need to work things out better.


Break-Even Analysis


As the name suggests, this ratio helps to specify just how much has to be made in sales in order to, well, break even. The sales department likes using this in order to help determine the services or products a business must sell for costs to be covered. Knowing that will also determine the point at which a profit can start to be made. This will also give you insight on where to improve so your business can do more than just break even or go a little higher than that point. After all, businesses cannot be called such if they don’t make profits.


Gross Profit Margin Ratio


When there's a need to figure out just how profitable a service or product will be, this ratio comes into play. Using this allows accountants to determine how much profit per dollar a business will make on sales for something before the operating expenses get taken into account.


Working Capital Ratio


Another term for this particular ratio is 'current ratio.’ It measures a business's financial strength on a full-on scale. It explores just how a business can convert assets into cash that can be used for liabilities like operating expenses. If the working capital ratio of a business is high, that's a good sign regarding its financial health overall.


Conclusion


Financial ratios are a key tool for any accountants, as they convert business performance into set values. That makes it possible to conduct the necessary work to get a clear overall view of a business's financial health. Widely used ones include the break-even analysis, gross profit margin ratio, and the working capital ratio.


Trying to find a small business accountant on the Gold Coast? Contact New Wave Accounting today! We provide end-to-end accounting and bookkeeping services that help scale and grow businesses.


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