What is Financial ratios?

You may not be an accountant and do not put too many thoughts on the company financial ratios. You thought that it is your accountant’s job, not your job. Do not do this. Please continue reading and you will understand what I mean.

The old concept Vs new concept

You normally get once a month print out of the Profit and Loss Statement and Balance Sheet from your accountant, and probably some cash flow statement.  You probably are happy with the submitted documents and prepare your monthly report and wait for the next monthly report. You expect your accountant will advise you on other things in your company operates. In most cases, nothing extra comes in.

You may get a monthly report from your salespeople and look at the performance of your sales team. You are happy with it since you have been doing it for years.

You will get upset when the report is not good, not up to expectation or the numbers are down. If you are hot-tempered, your staff will probably sugar-coat the reports so that things will look nice and sweet. 

When you start using the cloud technology, you start to find that the company operation information is available to you anytime you want. In fact, you get your information the instant the event happens. For example, when your staff sends any quotation, you immediately can know the value of quotation, who the customer is, what product and who is the salesperson doing it. Instantly. No need to wait for the monthly report. The same for your Profit and Loss report. You can run the system anytime you want, even when you are away from the office and you will get the report instantly. You are very much more advanced if compared to your competitors using the old concept. You get information instantly and can get data from your historical database online for months and years. You can analyze and try to understand what is going on in your own time. No data is hidden from you. Your challenge now is how to read the mountains of data so that you can make sense out of it and take the necessary action.

We will devote this section to Financial Ratios. They will help you understand your company operation, without the sugar-coated report that you normally got from your staff. As a CEO you must get the correct information so that you can make the correct decision. It is your company. It is your responsibility to make the correct decision.

Financial ratios

We will look at the various financial ratios and explain what it meant to your business. By now you already get the clue that I expect you to be well versed with financial ratios. You cannot leave it to your accountant alone.

I will include the financial ratios for non-listed companies as I assume you are running non-listed companies. Listed entities have a lot more financial ratios that they have to deal with.

You can look at financial ratios to monitor how your company performs, look at the trend or look at comparison against your competitors, see how you fare against them. 

What are the financial ratios?
Profitability Ratios
Liquidity ratios
Activity ratios
Viability Ratios
Investor Ratios