Despite years of searching, no one’s ever discovered a magic formula for business success that ensures the right outcome over and over again. But that doesn’t mean we can’t come close.
Financial ratios are the best way to understand your current financial performance. They take raw data and translate it into informative metrics that highlight your organizational health and underscore what’s going right and wrong in the process. Financial ratios can’t reveal the future, but they do offer important perspectives into the past and present that decision makers can’t afford to ignore.
The Key Financial Ratios
When you have reporting tools that make it easy to slice and dice data from inside and outside the accounting department, you can generate dozens of different financial ratios. For decision-making purposes, however, it’s important to focus on the ratios that say the most about performance. Otherwise, you could fall prey to analysis paralysis.
Whatever collection of ratios you choose to track, be sure to include these four performance-based ratios:
- Current Ratio: Dividing your current assets by your current liabilities gives you this ratio. It indicates your ability to pay short-term obligations (within a year) and helps determine the company’s liquidity.
- Acid Test (Quick Ratio): Unlike the current ratio, this one doesn’t include things like inventory in a company’s assets. By disregarding assets that are hard to liquidate, this ratio offers an additional perspective on whether assets can cover liabilities.
- Debt to Equity Ratio: The ratio of your total liabilities to your shareholder equity speaks volumes about the company’s financial leverage. It tracks how much operations are funded by debt versus equity and expresses whether equity alone can cover current debts.
- Net Profit Margin: Comparing net profits to net revenues demonstrates what percentage of every dollar earned is profit. As the “bottom line” of the company, this ratio reveals in stark detail whether a company is tracking upward or downward.
Financial Ratios at Your Fingertips
The importance of financial ratios highlights the challenges of financial reporting. Calculating ratios means finding the relevant data inside the ERP, pulling it out to integrate in Excel, spending time organizing the information, and finally generating a report about what happened last month or last quarter.
Past data alone isn’t adequate for data-driven businesses that are determined to base every decision on insights. Similarly, a few ratios aren’t enough for executives who need to examine all aspects of enterprise performance at all times. Past approaches to financial reporting were never ideal, but they’re totally inadequate in an era when metrics drive decision-making.
For a new approach to financial reporting that makes financial ratios vastly more accessible, consider solutions from insightsoftware. Across the lineup, insightsoftware products automate the most labor-intensive aspects of reporting while eliminating much of the manual input. The result is a scenario where reporting is so automatic that executives can track financial ratios in real-time, evaluating company performance in up-to-the-minute detail.
Instead of describing the best way to report on ratios, we’ve created a demonstration. A downloadable asset shows you how financial ratio dashboards from insightsoftware streamline how you track data so that every decision is informed by the best insights available. Download the dashboard for free.