Northern Initiatives Prosperity. That's Our Business Logo

Three Reasons to Care About Your (Financial) Ratios

Ratios 2
Financial ratios aren’t usually the first topic at cocktail parties. But for small business owners, maybe they should be. A solid understanding of the role of ratios can be an important measure of success.

 

Here are three reasons why:

  1. Financial ratios help compare your current financial position to its past history and to other businesses in your industry.
  2. They help focus your attention on the areas of financial strength and weakness.
  3. Once you track the ratios important for your small business, you can develop goals and an action plan to proactively manage your financial performance.

 

Ratios can be applied to and illustrate performance in several areas within your business such as:

  1. BALANCE SHEET RATIOS — show stability or staying power
  2. INCOME STATEMENT RATIOS — show profitability or earning power
  3. ASSET MANAGEMENT RATIOS — show overall efficiency ratios
  4. ASSET MANAGEMENT RATIOS — show working capital cycle ratios

 

As an example, here’s a deeper look at income statement ratios from a Northern Initiatives Business Services tool called the Financial Ratios Scorecard:

 

*How to Read Ratios: For every $1.00 of (bottom of equation) you have $X or X% of (top of equation)

Scorecard

 

Northern Initiatives customers have access to the full Scorecard and many other business services tools designed to help you grow your small business.

 

TIP: Feel intimidated by calculations? Ratios measure one number against another so if you can divide, you can calculate a ratio.

 

You can use ratios as a tool to calculate your Gross Profit Margin.

 

Ratio Formula
Gross Profit Margin2
 

In this example, for every $1 in sales, there are $0.29 of gross profit.

 

Need help? View this short video to learn more about the value of your business’s financial ratios.

 

 

Use ratios to take a concerted look at your small business and plan a course for greater success. That will give you plenty to discuss at the next party.

SHARE