Knowing your numbers is crucial to being a successful business owner. Financial ratios and key performance indicators (KPIs), which are a measure of employee performance, can be used to gauge your company's overall financial health and make informed business decisions.
Many types of financial ratios can be used, but some of the most popular are profitability, solvency and efficiency. Profitability ratios judge a company's ability to generate a profit. Solvency ratios gauge how easily a company can pay its bills. And efficiency ratios analyze how well a company uses its working capital.
All companies should pay attention to several key ratios including quick ratio, cash to current liabilities, collection periods, sales to inventory, gross profit and sales per employee. And specific ratios should be used for key business segments.
Most KPIs and financial ratios are calculated using information from your income statement and balance sheet. Good industry-specific accounting software will do the calculations for you and warn you of problems.
Keep in mind that financial ratios and KPIs will mean nothing if your company does not practice quality, timely and accurate bookkeeping. With a careful compilation and analysis of KPIs and ratios, you will be able to manage your business by the numbers.
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