PKF Carr & Stanton, Hastings, New Zealand
22 Mar 2016
With the end of the financial year in sight, you’ll be looking over your profit and loss statement and balance sheet. Do you know what to look for if you need to make some critical business decisions?
We often recommend doing a ratio-analysis, it can help you improve your understanding of the health of your business and identify trends over the past years.
Ratio-analysis can be used to identify the strengths and weaknesses in your business, and your accountant can assist you with the analysis. This can be particularly useful if you are facing improvement strategies for the years ahead.
Some business owners find financial accounting tools challenging, and it doesn’t have to be this way! A ratio is simply comparing one number in relation to another. And often these numbers can be reduced to one single number. For example, the ratio of 3:1 can be derived from the number 30 divided by 10, or 300 divided by 100, or 300,000 divided by 100,000. The size doesn’t matter; it is the relationship that counts.
In the sporting world, ratios are often used. In rugby for example, we compare the number of times a new player can convert a penalty successfully against the ones he missed. A ratio of 8:10 means he scored 8 times of the 10 times he tried. We can compare the ratio of a new player against an older player.
Of course we need to understand which relationships we measure in order to access useful information. Banks will look at the liquidity as they want to know if you can repay your debt in the short term.
There are four ratio categories:
We recommend using only two key ways to evaluate your business’s health:
Remember there is only so much you can change at any given time.
You need to know where to look and how to interpret the information.
At PKF Carr & Stanton we always work with the business owners to understand their business and to know how their business is performing. If you don’t feel you have the right accountant, we invite you to make a time for a complimentary review with one of our business advisers to discuss the options and plan a strategy for your future.
For more information on how our services can help your business get in touch.