Do ratios matter?
In a time of rising inflation, cost pressure, supply chain disruption and the energy crisis resulting from anything from Brexit, Covid-19, the Ever Given being lodged in the Suez Canal to shortages of HGV drivers and the recent invasion of Ukraine.
All have had an impact on businesses and their bottom lines. It has never been more critical for business owners to have a full and clear understanding of their financial position.
Understanding and analysing your financial statements as a business owner is vital if you want to evaluate your performance and make changes based on your knowledge.
Small businesses can be agile and at their best when they plan and react quickly. One major achilles heel for small businesses is poor profitability.
A business can succeed by knowing how to identify, track and act on profitability ratios and can determine whether your company will thrive or not -think of it as financial literacy. Understanding an array of ratios can help business owners to ensure their company is efficient and on the correct path.
These ratios can influence; decisions on which operations continue, changes in prices, choosing purchasing practices, considering bulk discounts and identifying where efficiencies can be improved in areas like material wastage.
Understanding operating profit margins highlights a business’ financial viability and core operations after variable production costs.
These ratios can demonstrate how the management team is running a business and track spending decision-making.
Remember, financial ratios and the understanding of them will not be lost on investors and funders and will form a major part in their decision whether to invest or not.