Accounting provides valuable financial information for your company. Its correct analysis will allow you to make intelligent decisions that will help define the future of the business and make it prosper. For this, more than a tax preparer is needed; you must work with a team of professionals to help you analyze financial information.
Many business owners remember to do their accounting or to see if their business had a profit or loss when it is too late; that is, at the end of the year and with the sole purpose of doing their taxes. However, the underutilization of the information that accounting gives you is a mistake that you should not make as an owner and compromises your company's growth. Accounting was born so that you can make intelligent decisions through the patrimonial, economic, and financial information of your business.
As an entrepreneur with limited resources, you must learn to read or at least become familiar with some basic concepts of financial analysis to guide your company on the road to business success. For example, if you want to know how much money to borrow and its repayment term, if it is the right time to invest or not in the purchase of machinery or how much money to invest in its acquisition, how much inventory to buy, and how often, etc. Knowing this information will help you to reduce the uncertainty about the future of your business and, in the same way, access to better credit or loans from banks.
Various methods are used to determine the accounting analysis. The most commonly used is the method of ratios or financial indicators. A ratio is a quotient between two amounts. From the accounting point of view, we speak of ratios as the quotient between the quantities of two items or groups of items included in the accounting reports. The main advantage of this method is its simplicity in analyzing your company's economic, financial, and equity evolution, taking as a reference the same ratio at different moments of the economic activity.
BASIC RATIOS YOU SHOULD KNOW.
1. Liquidity Ratio.
It lets you know your company's capacity to pay short-term debts with its assets. To make this analysis, you must have the accounting information of the cash account, bank account, stock, and debts. Knowing this ratio will allow you to know whether or not your company can cover its short-term debts and thus make the necessary decisions to improve your business.
2. Activity Ratio
Allow us to know how skillful we are in managing our company's resources or, in other words, to measure the operational efficiency of the business. They are also called asset management ratios because they indicate how well an organization functions in managing its assets in the short and long term; for example, inventory management or the collection terms of our customers. This is a ratio widely used by loan analysts.
3. Debt to Equity Ratio.
It is used to analyze the capital structure of the company, measuring its financing with debt capital and determining its capacity to meet the payment of its obligations. This analysis lets us know what part of our company's assets is financed with debt. We can also see the type of short and long-term debt we have. This index is fundamental to know when contracting a debt so it does not become a financial problem for our business.
4. Profitability Ratio.
It allows the evaluation of the company's profits from sales, assets, or owners' investments. One of the analyses is the net profit margin. Remember that it is not always essential to sell more but to improve the profit margin for each sale. We can also know if we are using the company's resources well. Thanks to this, we can learn how efficiently we generate profits and use the company's available resources efficiently.
More than hiring a tax preparer is required to grow your business efficiently. You must work with a team of professionals who, besides doing your accounting, will help you with your financial analysis. By reporting this analysis, you will be able to avoid problems in managing your resources and project your company's future more securely.
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