The financial ratioss are financial tools for determining a trend of profit or loss in capital investment or other money flow. In this article we will detail all its aspects.
Financial operating effectiveness increases in any organization, when financial ratios are implemented
Financial ratios
They are considered as mechanisms for collecting information and data that allow companies to know how to analyze a balance of the economic situation in a given period. For this, various processes and mechanisms are carried out that allow establishing criteria to make decisions related to the financial movement.
Managers and business leaders must know these strategies in order to identify failures or changes that may alter the course of the company's processes and plans. The analysis of the ratios allows knowing for sure if the necessary procedures are being applied.
In addition, economic projections can be established during certain fiscal periods. These criteria are necessary to look for alternatives that allow promoting the growth and efficiency of any organization. From the accounting, statistical and mathematical point of view, they are procedures to establish the relationship between two variables.
Each economic and accounting instrument can be analyzed in depth when the tools of financial ratiosyes The relationship between two variables allows considering aspects related to the financial situation, establishing trends and anticipating certain financial problems.
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Various types of financial ratios are known in the world of finance and business and can be classified into various groups. In this part we will see the most important and necessary, based on the company's activities and that can determine the company's operability according to the results.
Management ratios
They are those that serve to evaluate the efficiency of business management, help directors and managers to consider the management policy related to sales and inventories. Within it, the following variables can be seen.
career rotation
This ratio measures the time it takes for a company to cash in on a company's liabilities. In this case, it is taken into account that the number of accounts receivable is not greater than the sales account, since there would be a very high proportion of debtors and it would limit the payment capacity.
In this case, policies are carried out that can improve the collection process and reduce the liability account to bring back the cash flow. It is important to assess all the elements related to the company's productivity. Financial ratios should not be the only measuring instrument.
Rotating inventories
It is a ratio indicator that offers all the information related to raw material inputs and sales stock found in the warehouse. This indicator allows to offer fast and precise information to maintain inventories in order and with capacity; It is considered one of the most important ratio meters within a company.
Means of payment to suppliers
This ratio determines the supplier payment period and the time in which the cancellation will take place. It is a way to keep payments on time and avoid delays in debt cancellations in order to avoid accumulation towards suppliers.
cash and bank
It is a tool that helps to evaluate the cash movement of the accounts and the cash flow. With this type of meter, it is possible to know how the liquidity moves in the accounts and the box, allowing comparisons to be made on the income that occurs day by day.
Of total assets.
It is a ratio that is rarely used but it is very important since with it we can establish the volume of sales generated by the company in the periods that are needed. It is updated from time to time and has the ability to show, among other things, the difference between the money invested and the money received.
fixed assets
It is a financial ratio that helps measure and value the amount of total assets day by day, but only considers only the fixed assets of a company. It works based on being able to present reports with a lot of information about it.
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profitability ratios
This meter allows showing the performance of a company based on the relationship of sales, assets and capital, where four types are identified that must be adjusted to the conditions and characteristics of the company.
General
This ratio establishes measurements based on values where the highest ratio establishes a positive return. It is obtained by dividing the gross profit (without tax or discounts for other activities) by the total net assets, the result is a ratio sample which must have a positive result.
capital
In this case, the profitability of the capital contributed by the shareholders is measured, as well as that generated by the company itself. It is obtained by taking the net profit divided by the company's own funds.
own capital
This process makes it possible to measure the profitability of own capital where the company has invested some resources and has produced some type of profitability. It is achieved by taking into account the net benefit between the equity, the result must also be positive.
sales related
This action to calculate the ratio linked to the sale considers its relationship between the figures shown by sales in a given period and the manufacturing cost.
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Liquidity ratios
They are used to measure the level of solvency of the organization, it is an indication to know if there is liquidity for the payment of liabilities. This ratio is used in short periods and to anticipate situations of chronic delinquency. Liquidity ratios are classified into four types, let's see:
of ordinary reason
It uses the proportion of debts that are generated in short periods of time and serve to cover some asset accounts. It is obtained by taking into account current assets divided by current liabilities.
quick test
It is a type of measure known as “acid test”, it consists of establishing the capacity to assume short-term debts. The resources found in the inventory are considered. The assets that are part of that inventory also become liquid assets.
These assets cost to convert them into cash in the event of a situation of administrative instability or bankruptcy of the company. It is obtained by subtracting current assets from inventory and dividing the result by current liabilities.
defensive test
It is a test to know if the company can maintain operations in a short period of time with liquid assets, the result is obtained from the amounts of the cash and bank accounts divided by current liabilities, the result is multiplied by 100, since seeking to establish a comparison.
of working capital
It is a very easy meter to obtain since it considers the difference between current assets and current liabilities. This type of ratio is a good tool to know what a company has after making debt payments. In some cases it is important to determine at the end of a period the amounts of capital and cash to be able to operate.
of accounts receivable
This type of strategy shows two forms of measurement, the first is obtained by taking the average collection period, which results from multiplying the account receivable and the days of the year, between the annual sales in the current account.
The second way is to obtain the turnover of accounts receivable, which is the result of dividing the annual sales in current account by the accounts receivable. These accounting actions yield interesting results and are related to the movements of the company's financial debts. It is a good way to appreciate the trends in how the financial movement is based on the liabilities.
debt ratios
These measures allow to offer reports and results about the level of indebtedness of the company. It is linked to its net worth; is obtained as follows: The amount of liabilities is taken and divided by net worth, with this result short-term data is obtained.
To obtain long-term results, an operation is carried out where non-current liabilities are divided by net worth. Both results are necessary and their comparison can show related trends in how the organization is managing indebtedness in short and long periods of time.
Importance
They are considered financial measurement instruments that allow evaluating the strengths and weaknesses of a company. When analyzing the various statements related to the company's liquidity, then elements that lead to consider short-term indebtedness or leverage are considered.
It is a tool to evaluate if returns will really be obtained in certain periods of time. The financial ratios offer data where movements are reflected that allow the directors of the company to know where to direct the operational strategies.
In the same way, it helps them determine the operational alternatives that may be more beneficial for the organization. Which leads to determining them as fundamental elements in the planning of annual operating activities of any company.
Advantages
It allows you to have at hand all the information related to goods, assets, liabilities, inventories, cash flow and other accounting activities. They allow to streamline processes without the need to prepare accounting reports in vulnerable areas.
Financial ratio procedures are constantly delivering results that are valued by managers. The latter decides how they can be analyzed and considered for decision making; For all this, ratios offer any organization the following benefits:
Prosperity as an organization where accounting anomalies can be corrected on time, so that various types of ratios can be established in order to consider alternatives to make corrections that allow failures to be evaluated.
The ratios offer transparency in the operations of the accounts, their movement can be known and they pride themselves on directly measuring the movement of business liquidity. In this way, results and trends are appreciated in periods of time that management needs to establish the necessary measures.
Disadvantages
Despite being a working tool for managers, ratios can also present certain factors that determine some disadvantages, among which the fact that they do not allow comparison between several companies in the same branch stands out, since there are differences in accounting methods for valuation. of inventories.
On the other hand, the results of the reports are based on past accounting situations and movements, so they are taken into account to see if future strategies can be changed. On the other hand, they are not prepared to measure other business activities and their limitation is determined to offer accounting-type values.
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Conclusion
When the measurements of the ratios show values higher than expected, it is very important to take alternative measures to slow down certain processes. Let us remember that rapid accounting growth triggers anomalous situations in the future.
It is important to know to what extent a debt with suppliers can be maintained and also to know alternatives to maintain cash flow and liquidity in the company. The values displayed by the financial ratio formulas greatly help in taking control and management of certain areas.
That is why the importance of knowing how to read certain values that offer the results of the formulas. For example, if we have a result in a higher ratio than the base, this is an indication of low profitability of resources, it shows the existence of unused assets for certain activities.
Managers must take into account many elements and results in order to reach a conclusion related to the decisions they must make. These results must also be compared with other operational areas of the company.
