Ratio Analysis and QuickBooks 2012 - dummies

By Stephen L. Nelson

Numbers from your financial statements in QuickBooks 2012 make more sense when you can compare them to other numbers and external benchmarks. Ratio analysis is this type of analysis. Even if you’re not a numbers person, you can use ratio analysis to your benefit. Ratio analysis is easy to apply, and it enables even the non-quantitative type of person who uses it to better understand the information in financial statements.

  • The ratios are only as good as your inputs. Obviously, the more accurate your QuickBooks accounting records are, the more accurate any ratios that you calculate by using the numbers from your QuickBooks financial statements will be. This makes sense, right? Garbage in — garbage out.

    Even if your financial records are garbage free, if they contain something just slightly wacky, such as an unusually large transaction that skews all the numbers, your financial ratios aren’t as good as they might be.

  • Ratios become relevant through comparison. Your financial ratios become most relevant by comparing your numbers with those of your competitors, the numbers that you had a year ago, and the numbers that a bank loan agreement specifies are necessary for you to continue achieving in order to be in the good graces of the bank.

    A comparison with other ratios is crucial because your numbers are often only just numbers if they can’t be compared with external benchmarks.

Note: When you compare yourself with other firms by using financial ratios, you compare yourself with firms of a similar size. It usually doesn’t make sense to compare, for example, a million-dollar business with a billion-dollar business.

Some of the QuickBooks financial statements provide simple financial ratios automatically. For example, you can add the gross margin percentage (and other percentage measures) to the standard income statement and to the standard balance sheet.