Have you ever heard of financial ratios? Does that term scare you? To be honest, it scares me a little bit because it’s something that we don’t look at enough as accountants. On the whole, internal accountants and management accountants do. tax accountants don’t as we don’t come into contact with your work enough during the year. It is however something that we really do love doing, and helping you manage your business means we need to look at financial ratios.
There’s a few ratios that we look at on a regular basis:
- Quick ratio, which is your cash and debtors divided by your current liabilities or the accounts payable. And that we want to keep as high as we can, so having more liquid assets and we’ve got bills to pay.
- Current ratio, which is current assets divided by current liabilities. This is like the quick ratio but with more information in it.
- Debtors Days – this shows us how many days people are taking to pay you – if this starts to increase, you are going to have cashflow issues
- Stock Days – this shows how many days stock is taking to turnover – the quicker you can turnover your stock, the better your cashflow and most likely the better your profitability.
Honestly, there’s books written about ratios, I studied them at Uni a long long time ago. Google can tell you all about them, Chat GPT can tell you all about them. If you want me to go into it with you I can but it’s really to much content to write in one blog.
So if you do want to understand ratios and how they’re relevant to your business, make an appointment and we’ll sit down because it is different from business to business.