Why Are Financial Ratios Important For Your Business?

Author : netashaadams
Publish Date : 2021-04-07 14:08:43
Why Are Financial Ratios Important For Your Business?

Business entities need tools to measure their performance and compare it against the industry standards. Finding such tools has always been a challenge for companies until they came across financial ratios. These ratios are effective instruments that offer entrepreneurs a complete package for evaluating their performance and comparing it against similar industry standards. The role these financial ratios play in the improvement and decision-making cannot go unnoticed. They tend to compare to two different aspects of financial statements and uncover trouble signs, if any. The list of advantages is long, but we will make it short and brie here. Keep scrolling to learn more about these ratios.

Top 5 Advantages of Financial Ratios for Businesses:

Ratio Analysis is significant for the organization to investigate its financial position, liquidity, benefit, hazard, dissolvability, proficiency, and activities. The analysis also offers adequacy and help in legitimate usage of assets, demonstrating the pattern or investigation of monetary outcomes that can be useful for dynamic speculation by investors of the organization. Are you interested in knowing these benefits on a comprehensive list? Here it is given.

1. Helps in financial statement analysis:

Financial statement analysis and data are fundamental for all inner and outer stakeholders of the firm. Every stakeholder comes with different business needs and will demand from you accordingly. The resuls from the financial statements become necessary when you are required to decipher the numbers and distribute shares among the shareholders.

The numbers from the balance sheet and income statement are more important to financial creditors and equity investors. The investors would like your firm's earning power to grow so they can earn more dividends. The creditors would be more concerned about your repaying abilities so that they can receive their periodic installments on time. With the help of ratio analysis, all these tasks are easily done.

2. Helps in operational efficiency of the business:

Certain ratios assist you with breaking down the efficiency level of a firm. Out of the severl financial ratios, fixed asset turnover ratios and accounts receivables turnover ratios help a business measure operational efficiency. These ratios can be compared with similar industry rivals and assist with dissecting which firms are doing better when compared with the others. It estimates an organization's ability to produce revenue by utilizing resources.

The efficiency ratios enable a firm to check several aspects like the time it takes to collect debtors' debt. They also calculate the time a company takes to convert inventory into cash. These ratios account for the operational efficiency of a business. It would be best to calculate how your business is doing on the operational efficiency front by joining hands with the best accounting firms in Dubai.

3. Helps in calculating financial profitability of a business:

There are various proxies available where a firm can determine its financial profitability. All these tools and instruments fall under the category of profitability ratios. Some of the profitability ratios are discussed here:

  • Return on Assets (ROA):

One of the most widely used proxies is the return on assets (ROA). The ratio is expressed as net income divided by the total assets of a company. This ratio enables a business to determine how much profit it is earning against every single dollar invested in the firm's assets.

  • Return on Equity (ROE):

The ratio is expressed as net income divided by the shareholders' equity. This ratio enables a company to know how well it uses the shareholders' funds to generate profits.

Other ratios like gross profit and net profit margin help a business determine its ability to translate sales into business profits.

4. Helps a business know its liquidity position:

The liquidity position of any firm is crucial since it determines the ability to pay its short-term liabilities. Short-term debts refer to those which are payable within one year or operating cycle. The ratio analysis helps a firm know its ability to cover these short-term obligations. These obligations include salaries, taxes, sundry creditors, and outstanding expenses.

Financial ratios like current ratio and quick ratio are used to determine the liquidity of any firm. Another tool that explores how much cash a business has to cover its liabilities is the cash ratio.

5. Helps a business calculate risks:

The business management needs to know how much the operations are exposed to fixed cost deployment risk. One of the most important uses of ratio analysis is to calculate business risk. Ratios like financial leverage and operating leverages help a company know its risk position. Do you want to know your firm's risk status? Hire the best accounting firms in Dubai and let them do the ratio analyses for your business.

Streamline your business operations with accounting experts!

Today's competitive business landscape is driving businesses to be more efficient in their operations. The efficiency comes in numerous ways; the most important one is streamlining accounting activities. Join hands with expert accountants to take your business to a new level.

Category : business

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