As an entrepreneur or business leader, it is vital to understand health of the organization at predefined intervals during financial year. On daily basis, leader spends good amount of their time in generating new opportunities, expanding existing opportunities or managing operations, in this juggle of managing and balancing everything, it is very critical that they understand health of the organization in concise, crisp and accurate manner. This is where financial ratios can become a helping hand.
Articulating financial ratios are not complex, they are simple to comprehend and in addition to that they are short and more importantly ratios provide logics of your financial transactions. Financial ratios are an imperative tool for quantitative analysis of organization health. It helps leader in
So the question is what to look in financial ratios? The answer is simple, there are five types of financial ratios organizations shall emphasize.
For each type, there are certain parameter OR ratios which organization shall see to determine health. Let us walk through some of the common ratios and its parameter and at high level to understand what it provides.
Margin Ratios
This is the most common area which are used to understand profitability of any organizations. There are several types of margin ratios, few are mentioned below.
Liquidity Ratios
Liquidity ratios is an important accounting tool which determines a debtor’s ability to pay off current debts obligation without raising external capital.
Leverage or Solvency Ratios
Leverage ratio indicates the amount of loan (debt) business has taken on the assets or equity of the business.
Operational Efficiency Ratios
Efficiency ratios use to analyze how well a company uses its assets and liability internally.
Return Ratios
Return rations, simply as name suggest, reflects company’s ability to generate return of its shareholders.
The importance of each ratios changes based on type of industry the organization into and their current situation. For example, for Manufacturing organization Asset turnover and inventory turnover plays critical role comparing with software development organization. Moreover, benchmark of each ratio gets change based on type of industry, no one ratio tells us everything, but selecting and interpreting combination of ratios, helps organisation make decision wisely. This are few of many financial ratios, organization shall understand their nature of industry and choose ratios which matters to their businesses. Ratios helps a business owner and an investor with relevant or logical information through which further actions can be decided. It helps in identifying target area for improvements.
At J.hirani & associates, we help organization achieving their objective within the framework of best practices and scalability. To know more about which financial ratios works best for your organization, visit our website reach us at info@jhirani.com
Author:
Saurin Parikh, who has done Masters in International Business and Management Information System from Texas, is also a Certified Business Analyst. He started as a business analyst with Jagdish Hirani & Associated, is currently leading the core operations of transformation projects. He has wide experience in industries like home furnishing, diamond, tourism, food sectors etc. He is Observant, Conscious about facts, Patient, Positive, gives attention to detail and believes in total Completeness.
Success Mantra – “You have to touch ground (foundation) to make perfect organizations. Right methods with consistent approach are bound to yield results”
Harsh Pavani, a PGDM graduate is associated with J.hirani as a Business Analyst, who is a great believer of ethics and likes to stay quiet and humble. He is always ready to learn something new and has worked closely in the industries of manufacturing and hospitality.
About J.hirani: J.hirani is a Strategic Transformation team which works as a growth partner for different organisations in various industries by providing services like Agile transformation, Scenario mapping, Strategic alignment, Balance scorecard, Digital transformation, Incubating new ventures, Operation excellence and Aligning human capital.
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