Simple Math, Powerful Messages

Why Ratios Are Key To Understanding How Your Business Operates
To the casual, uneducated observer, answering the question ‘how’s business?’ should be a relatively easy task. Just observe the bottom line, determine if profits are going up, and prepare for future events or changes in competition. Seems pretty straightforward, doesn’t it? Well, what if someone were to probe further and ask about ratios, such as your return on assets, or a pre-determined collection period? Now things become much more complex.
Accounting Solutions Ltd. has decades of experience working with business owners to address questions such as these.  We understand that all entrepreneurs, and many members of the general public, know that there are more than just a few dimensions to responding to the seemingly simple ‘how’s business?’ query. One thing that all companies work with, (alongside dealing with taxes, balance sheets etc.), are numbers. In particular, the ratios that are a fundamental part of understanding how one’s business operates.
What is a financial ratio exactly? Simply put, it is a relationship between numbers on income statements and balance sheets that translate into important, insightful information. One of the most well known ratios is the one used to determine profit margins. This is simply calculated by dividing net income by sales, with the resulting percentages indicating how revenue exceeds overall expenditures.
Determining a profit margin is, of course, one of the most fundamental ratios that any business utilizes; yet these simple calculations can dig much deeper. Using basic number crunching, one can determine valuable information regarding turnover, debt, liquidity, and much more. By sorting out these numerical values, and perhaps consulting with a CPA, you can spot trends and start to compare your company’s performance in both the past and present. This type of analysis is invaluable when making a strategy for the future.  It is absolutely vital when bracing oneself to handle the competitive storm that comprises Chicago’s business climate. Ratios have many uses outside the inner workings of businesses as well, as exemplified when bankers use them as part of loan application process.
Some other useful ratios include:
The Current Ratio: Dividing current assets by current liabilities can help determine if the company in question has enough funds to handle liabilities or debt payments when their due dates arrive.
The Gross Profit Margin: You can figure out how much money is required to cover operating expenses by dividing your business’ gross profit by its total sales.
The Debt-to-Equity Ratio: Investors may play a key role in your company/  In this scenario, it is absolutely vital to determine how heavily the company is actually leveraged. This can be calculated by dividing your total liabilities by the stockholder’s equity.
The Net Profit Margin: Income divided by total sales shows how much profit is accrued per dollar once all expenses have been paid.
Number crunching isn’t something that is only the work of CPAs. Ratios are a simple, yet effective way, to understand the health of your enterprise and to plan for future financial results. Accounting Solutions Ltd. is more than willing to discuss this topic, or anything relating to finances, taxes, or business operations in general. We are just a phone call away. Please call for a free consultation!
Chris Amundson