In business, it is important to know the financial health of your business and it depends on many aspects and one of them is ratio analysis. Ratio analysis is a very useful tool for financial analysis of the business. The ratios indicate whether the business is in good condition or bad, whether the liquidity of the business is in a good position or bad position. These ratios and reports generated are very useful for both the internal management of the business as well as for the stakeholders of the company. These ratio analysis reports permit stakeholders of the company to get a better understanding of the position of the business and take the appropriate decision later.
In this blog, we will discuss in detail why ratio analysis can be useful for your business.
- Evaluation of operational efficiency: Certain ratios highlight the efficiency of the business and especially assets and other resources. If a business has to avoid cash blockages then it is necessary that the company allocate the financial resources efficiently. And, with the help of ratio analysis, the business gets a lot of information that is necessary for making these important decisions.
- Profitability measurement: Profit is the main motive of any business. Ratio analysis helps the company in determining the proper use of assets so that profit can be earned by the proper utilization of these assets. There are many ratios like gross profit ratios, net profit ratios, expense ratios, etc that are used in measuring the profitability of the company. And, these ratios can be used very smartly to improve the profitability of the business.
- Ensure suitable liquidity: Every company should make sure that some of its assets are liquid because in emergency situations you may require cash that can be fulfilled only if you have liquidity in your business. The liquidity of the company can be measured by ratios like current ratio & quick ratio.
- Identifying Risk: There are many unforeseen risks involved in the business and ration analysis helps in understanding these risks and thus management will be ready to take the necessary actions in advance to avoid the risk or mitigate the effects of risk. Financial ratios like Interest coverage ratio, Debt coverage ratio help the management to know how much the company is dependent on the external capital sources and it also helps to know the company’s ability to repay debt.
- Determining long-term solvency: Solvency means the ability of the firm to meet its long term debts and other financial obligations. There are various ratios that help in determining the long-term solvency of the firm. So, if the situation does not look good in the reports then the company can take various steps to improve the situation.
So, in these ways analysis can be very helpful for your company. And, for ratio analysis, it is advised to take the help of the various softwares available in the market for that work. And, when ratio analysis is concerned the best software for ratio analysis is undoubtedly – Tally. It is a very effective software that helps the company to carry out ratio analysis and also helps in the decision-making process of the company by providing various statements that assist in proper decision-making.