Ratios measure factors such as your company's profitability, solvency, efficiency and indebtedness.
Bankers often include financial ratios in a loan agreement. For example, you may be required to maintain your equity above a certain percentage of your debt, or your current assets above a certain percentage of your current liabilities.
However, ratios should not be assessed only at the time of a visit to your banker. Ideally, you should review your ratios on a monthly basis to monitor trends within your company.
Leverage ratios give an idea of a company's long-term solvency, and indicate the extent to which it uses long-term borrowing to finance its activities.
Indicates the percentage of a company's assets that have been financed by creditors. This ratio is very important for companies with heavy investments, financed by large loans, and thus generating high interest costs at the same time.
Indicates a company's total indebtedness compared with the sums invested by the owners. If you're looking for a shareholder or investor, you can easily show them your personal investment using this type of ratio.
Liquidity ratios measure the amount of liquidity (cash and readily convertible assets) you have available to meet your commitments, and provide an overview of your financial health.
These ratios illustrate a company's ability to meet the immediate demands of its creditors, by drawing on its most readily available assets.
This ratio will reassure a potential lender when you need to apply for a loan.
See also 7 sources of financing to get your business off the ground.
Read also: 3 key elements for obtaining a loan.
- Current ratio (also known as working capital ratio)
This ratio indicates whether the company has sufficient working capital to meet its short-term obligations, seize opportunities and obtain favorable credit terms.
Profitability ratios are not only used to assess your company's financial viability, they are also essential for comparing your business with others in the same sector.
Estimates the percentage of sales the company retains after payment of operating expenses, interest and taxes.
This ratio indicates the after-tax profit obtained for each shekel of equity.
This ratio indicates the profit obtained in relation to the investments made by the company to generate this profit.
In the first year of your business, cash flow is the key to success!
If your customers sense that you're "in a hurry to sell", or if your suppliers sense that you'll need extra time to pay them, you'll no longer be in a strong negotiating position.