If you're not an accountant or financial analyst, one look at a list of financial ratios may give you a number-induced headache. However, these economic ratios are a key factor in improving the way the company works and increasing revenue. In making the most of financial ratios, not only must you understand the basics of ratios, but also how to use them in an effective manner. Financial ratios in addition to providing a snapshot of your company's fiscal fitness, they also offer a means of comparison to competitors and the industry as a whole.

Making the most of financial ratios requires a better understanding of what these ratios mean in a larger context. Liquidity ratios, for example, can give you a status of the company’s credit worthiness, and act as a comparison tool to other companies. This influences the company's ability to attain and keep a healthy credit rating. Moreover, if you want to maximize the utility of financial ratios there are few items to consider, such as:

1. Purchase financial ratio analysis improvement aides.

2. Utilize standard financial ratios industry comparison tools.

3. Make use of financial ratios templating and tutorials.

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Acquire tools to help with the analysis of financial ratios

To get beyond the basic inputting and calculating of financial ratios and truly make the most of these ratios, you should understand how to interpret these figures. A financial ratio such as the current ratio by itself tells you nothing. However, if you can apply this figure in the context of the business operations, it'll help improve your company.

I recommend: Obtain a copy of The Power of Ratios—Learning What the Numbers Are Really Telling You from Harvard Business Publishing. Examine the uses of financial analysis with ratios at eSmallOffice.

Contrast your business' financial ratios with industry standards

Financial ratios also offer an opportunity to gauge the company against industry leaders and competitors. These figures make an excellent tool to determine if your company is price and performance competitive.

I recommend: Employ the industry analyses from VentureLine to verify the financial status of your company. Buy industry financial ratio profiles from BizMiner. Its Industry Report Center offers detailed industry profiles including financial ratios for 10,000 lines of business including profit and loss statements, balance sheets and more.

Use applications to help in calculating financial ratios

Financial ratio calculation is much easier if you take tutorials and use templates. Templates reduce the time and error probability when computing these financial ratios. In addition, a ratio tutorial can assist in understanding the application of the ratios, which not only helps you make the most of using financial ratios, but it also makes the most of your time.

I recommend: Purchase the Excel ratio templates from MyWorkTools.com. This tool helps determine the overall health of your company by looking at items such as cost of goods sold, revenue, operating expenses and more to calculate liquidity, key activity, productivity ratios and coverage. Take the ratio tutorial available at Adayana. This course helps you learn and make the most of liquidity ratios, solvency ratios, profitability ratios, efficiency ratios and asset utilization ratios.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Calculating economic ratios is important to your company, but living by numbers alone won't allow your company to prosper. An effective business combines an efficient use of financial ratios with an employee friendly work environment. Some policies may help your fiscal fitness, but end up damaging company morale.

Understanding the financial details of your business – and, at times, being able to communicate them to others – can mean the difference between success and failure. Informed business owners pay attention to the numbers that show whether a business is profitable, has cash flow problems or is spending too much in certain areas. Analyzing financial data also can help you set business objectives on a monthly, quarterly or yearly basis. Here are three reasons to organize and study financial statements:

1. Get an overview of how your business is doing and where it is heading.
2. Keep control of general and administrative expenses.
3. Careful records can help attract investors to your business.

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Discover the details of different financial statements

The income statement and balance sheet are the main parts of a financial statement. Income statements, also called profit and loss (p&l) statements, show the money in (income, revenue and sales) and money out (expenses and costs) of a business. What's left over is the profit. Balance sheets show what a company owns and what it owes. A cash flow statement looks at ways cash enters and leaves a company.

I recommend: Get up to speed on financial statements at StudyFinance or Tutorialized. At StudyFinance, from the University of Arizona, you can get a particularly succinct overview and examples of key statements, including the balance sheet, income statement and other basic financial statements.

Know the important line items

There are several key pieces of information you'll want to analyze. Working capital is determined by subtracting current liabilities from current assets. Look at the amount of revenue you earn on a monthly, quarterly and yearly basis to see if you are meeting your business objectives. Compensation may be one of the biggest expenses if you have employees. Don't forget to include the costs of your own salary and benefits.

I recommend: The U.S. Small Business Administration has a helpful section on financial statement basics for business startups. You'll find detailed explanations of balance sheets and income statements.

Enlist software help to get your financial ducks in order

Financial software can help collect and organize financial information, as well as run a wide range of charts and reports.

I recommend: Install MYOB or Quick Books on your computer to handle your accounting needs. Use the budgeting function to record numbers and generate reports. Each program offers extensive help to prepare and understand the different types of financial statements you can produce.

Check the bottom line on profits

Profit margin is found by subtracting general and administrative expenses from gross profit, then dividing that number by sales.

I recommend: Infor has software that creates financial reports. Write an annual report to share company progress and financial data with investors.

Establish more financial credibility

Listing your company's financial information with a business database can help give potential clients an overview of your company's financial history and stability. Financial statements, bill-paying history and creditworthiness are just some of the areas that clients may be able to access in a report about your company.

I recommend: D&B has small business reporting solutions.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Manage information proactively and look through financial statements on a monthly basis.
• •  Carefully kept records are crucial in case you must respond to an outside audit.
• •  Keep an internal trail of transactions so that you can track any discrepancies, such as unrecorded payments.

In order to manage your business budget properly, you should understand the financial ratios basics. Financial ratios paint a positive or negative picture of the past, present and future of the company. Not only can these ratios help with your business, but they can also serve to compare it to other companies within the industry. With a list of financial ratios, it becomes much easier to see any fiscal problems that reside within the accounting ledger.

If you can master financial ratios basics, using and analyzing these figures will eventually become second nature. To a novice the terms liquidity, asset turnover and financial ratios can seem confusing. However, once you establish a basic knowledge of these ratios, your business will show marked fiscal improvement. Before you attempt to implement financial ratios, there are a few items that'll make the process much easier, such as:

1. Examine the definitions and uses of economic ratios.

2. Learn how to implement the financial ratios in the context of your business.

3. Calculate the money ratios using your business figures.

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Review the basic purpose and definition of the standard financial ratios

To internalize financial ratios, it's best to start with the basic definition and computation. If you can begin to understand the derivation of each term, and how it relates to your company, then the real world application of each ratio becomes simpler.

I recommend: Use the business financial ratios explanation at NetMBA to define these computations. You can also visit the American Express website, which offers quizzes and tutorials about financial ratios.

Examine the real world applications of financial ratios

Simply memorizing a list of financial ratios isn't going to help you use these figures effectively. For example, liquidity ratios can help your business determine its creditworthy and cash position. However, if you only know the literal definition of the ratio, it'll be difficult to apply the ratio to help improve the company. Seeing these ratios used in a business context can help with this issue.

I recommend: Take the financial ratios tutorial at Investopedia. Use the Understanding Financial ratios from Money-zine.com to know how these ratios influence your company.

Input your business figures into financial ratio analysis software

In order to verify that you or your employees understand the process of computing financial ratios, use figures from your business in applications that compute the ratios. Financial ratio software provides a simple way to compute ratios once you know the derivation of each figure. This way you don't have to waste time setting up your own ratio models and, thus, it allows you to use financial ratios basics more easily.

I recommend: Employ the ratio calculator at Bankrate.com to determine the ratios for your business. Download the software available at MBAWare to get a better idea of how each financial ratio analysis software relates to each other.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  When calculating financial ratios, it's important to perform the process at least twice. One misplaced number or decimal can give you an erroneous ratio. To take it a step farther, you should have another employee double check each financial ratio calculation before you make business decisions based on these figures.

The amount of financial ratios available to analyze a company's financial well-being seems endless, but understanding the basics of financial ratios can help you sift through the many types of ratios and how they are used to keep track of assets, liabilities, sales and much more.

Learn the basic financial terms associated with distinguishing ratio information. Get key terms under control before starting any financial ratio calculations so you don't run into a number you're not sure how to calculate.

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Baseline

The baseline is a number figured by using past financial information. It is needed when you start using financial ratios to determine a current situation as it compares to your company's past financial history.

I recommend: Read the definition of baseline and find out more about financial ratio analysis at American Express.

Fixed asset

A fixed asset is a tangible item used to produce income. The item must be something in use for at least a year to be considered fixed, because it is a long-term property.

I recommend: Fixed asset is defined at Investopedia. The website also includes many other financial ratio terms and definitions.

Growth ratio

The growth ratio is a rate at which the company is expanding. There are several types of growth ratios used in financial analysis including sales, dividends and net income.

I recommend: Read about the growth ratio and many other financial ratios at Money-Zine.com. The website offers definitions and explanations of how ratios are calculated.

Solvency ratio

Solvency ratio is the measurement used to determine how well a company can repay its debts. Ratios are used with loan officers and investors considering company stocks.

I recommend: Read the definition of solvency ratio at eSmall Office and find out what types of information are needed to calculate the ratio.

Gross margin

Gross margin is a percentage calculated by dividing the profit totals by the revenue a company gains from sales. It is used in finding out how financially stable a company is.

I recommend: Read about financial ratios and the gross margin at The Financial Pipeline.

Current Ratio

The current ratio is a financial measurement showing how much a company owns in assets to cover any liabilities they have. It gives a good understanding of how much cash a company has to pay off immediate bills.

I recommend: BizStats includes an entire section on financial ratios. Use their glossary to get a definition of current ratio and other terms.