Financial ratios help you get a better handle on your operations, see when things are out of kilter, and set down milestones for the future. Financial ratios help you answer these questions: Do I have enough working capital? Will I be able to make payroll and the next flock of bills? Is my debt too high? Will I have any difficulty meeting long-term obligations? Am I using my assets wisely? Is my inventory too large, or does it take too long to turn over? How profitable is my business?
The worksheets in this download will help you calculate 10 key ratios each month from which you can track financial trends in your business. (For an explanation of ratios, see Defining Key Ratios.)
How to use the Calculate Ratios and Ratio Analysis worksheets:
To determine your current month's ratios, first use information from your most recent financial statements to calculate the 10 key ratios using the Calculate Ratios worksheet. You'll need to monitor the ratios for two months before you can start using the Ratio Analysis worksheet.
Once you have two months' worth of ratios, then use the Ratio Analysis worksheet to monitor changes between your most recent month's findings and the previous month's results.
Subtract last month's ratios from your current month's results. Thid will give you the absolute change to this month from last month.
Use the Comments area to note if further action is proposed; make a note about who is to do what -- and by when.
Keep the Ratio Analysis worksheet from month to month as a reminder of actions you think you should have taken in the past (or as a record of actions you did take). The cumulative effect of several months' minor improvements in operations can be striking. This is an incremental approach to improving operations, not a quick cure, but it has the advantage of being very controlled.
The worksheets will also be helpful when you write your annual business plan and make strategies for the future, as well as being handy for setting monthly goals.
Based on the experience of people who have followed this kind of management, you may at first be disconcerted by the results you get. If you haven't been following these items on a regular basis, it can be a bit unsettling until you get used to discounting unimportant short-term fluctuations. The trick is to separate the unimportant from the important, and that takes a lot of experience.
This material was adapted from Chapters 11 and 12 of Financial Troubleshooting , by David H. Bangs Jr. and Michael Pellechia.