Evaluating your financial situation is part of your strategic planning process, because the financial health of your organization is critical to your corporate growth. Want to know how your business is really doing? Evaluate your financial performance by looking beyond the numbers on your balance sheet and income statement. By themselves, these statements are informative, but they aren’t nearly as informative as the relationships between the numbers.
Instead of evaluating your past financial statements, analyze the financial ratios. Financial ratios are derived from pulling two numbers from your financial statements and dividing one by another. Doing so helps you create a ratio that eliminates any problems of comparing one company to another. With ratios, you take out any size difference so you can compare apples to apples.
Additionally, you can compare your ratios to your industry averages to determine whether you’re doing well. Most industry associations compute these ratios. Contact your association to see what they can provide you.
Dealing with financials statements and numbers can be daunting. But don’t worry. You don’t need to track and monitor everything, but just track key numbers that help you understand the financial dynamics of your business. When tracked and measured regularly, these key financial ratios allow you to
Get a more accurate understanding of your company’s financial performance.
Compare performance against the prior year, current budget, and your industry as a whole.
Establish benchmarks to see where you’re going and how you’re doing.
To make interpretation and management of these ratios easy, group them into four categories: liquidity, risk, profitability, and productivity.