Other financial ratios
In addition to the profitability ratios, there are a few other essential financial ratios for the small business owner.
Efficiency or Activity Ratios
</br>As the name implies these ratios measure how efficiently resources are used in the business.They include:
- Average stock turnover period - how often does the stock turnover between buying and selling it.
- Average settlement period for Accounts Receivable - depends on the online business e.g., whether customers pay upfront or terms of payment for services.
</br>The survival of your business relies on having sufficient liquid resources to meet your present obligations. In plain terms, are you able to pay your debts? They include:
- Current ratio - the value of current assets to cover current liabilities
- Acid test ratio - the value of more liquid current assets to cover current liabilities (excludes stock and prepayments)
</br>These ratios are important. They reflect the degree of risk associated with the business based on loans to the business, by the owners or other finance providers. These ratios highlight the business use of borrowings. They include:
- Gearing ratio or Debt to Equity- the degree to which the business is funded by external financing and/or capital contributed by the owner
- Interest cover ratio - number of time your profit covers your interest costs
Your Accountant can help you to work through the different types of ratios that are used in your financial report
Search the internet and find a video on financial ratios and how they can be applied to financial statements.
Post the video link in the Comments area and give a brief description of why you chose this video to share.
© RMIT University 2016