There are many ways to analyze your accounting data, ratio analysis being one of them. When you use ratio analysis, you are comparing figures from different categories. There are a number of different ratios you or your accountant can use depending upon what represents the most important relationships in the data for your company.
Some of these ratios are explained below:
Liquidity ratios: This ratio is related to the company when it can satisfy it's maturing short term debt. Liquidity is important when the company wishes to continue business activity in a positive cash flow. When the company is not doing well due to recession or a significant rise in price of some product you are purchasing, liquidity could be inadequate in preventing further losses. As a result, liquidity is a sign of problems if the ratio is low. Some important liquidity ratios are Working capital, Current ratio, Quick Ratio and the cash flow ratio.
Working capital=current assets-current liabilities
Current ratio= current assets/current liabilities
Quick ratio= cash+marketable securities+accounts receivable/current liabilities
cash flow ratio=net income+noncash expenses (eg. depr)-noncash revenue
Determining these ratios are vital in understanding how your cash and short term securities are doing. If your banker is requesting ratios from your company, your liquidity ratios are what they look at to see how your debt load is. Your cash flow is an important piece of every business structure and handling it appropriately in all situations keeps your business afloat.
Copyright Jeanine Pfeiffer