Left baffled by your accountant? Meetings end with you googling terms that didn’t make sense? Don’t get bamboozled, making sure they are clear in their explanations will give you the best chance to keep your business successful.
Your accountant should be much more than someone who just reminds you about filing deadlines and keeping the tax man happy.
When it comes to understanding the financial health of your business, your accountant should be able to assess your company’s performance and help you make better decisions.
Working with your accountant as a trusted advisor, almost more of an outsourced Finance Director, will mean you receive strategic advice that will help keep you focused on growing your business and achieving your targets.
Having regular review meetings with your accountant should give you confidence when it comes to understanding your company’s finances. Your accountant might prepare monthly Management Accounts documents for you, for example, that will include reports showing if you are making a profit and highlight any areasthat need more attention.
But during those meetings, have you ever felt like your accountant has started talking in another language? At Blue Rocket, we believe in plain speaking and want to make running your business as easy as possible, but if you’ve ever heard your accountant casually mention phrases like ‘Accounting ratios’, ‘Key performance indicators,’ or ‘cost benefit analysis’, you could be forgiven for thinking, ‘But what does it all really mean?!’
Accounting ratios – what on earth are they?
Find out how your business is performing, fast!
By comparing two items in a company’s financial statements,ratio analysis can make the numbers much more transparent, and is a good way to evaluate the financial results of your business.
The metrics can be used to gauge your performance and monitor progress, make improvements to your business, and can even be used by investors to evaluate the best investment option.
There are lots of different types of accounting ratios, but the most common are:
· Liquidity and solvency
There are a few different ratios that look at liquidity, and if your business can pay its debts.
‘Current ratio’ looks at the money you have in the bank, or that you can easily convert from available assets, against your current liabilities– money you owe to others. Liabilities might include bills, wages or taxes due,for example. Your assets are divided by your liabilities to give a number, and the closer to 1 the number is, the less able the business is to cover its debt.
The ‘Quick ratio’ (aka ‘the acid test’) is often used by investors to see if a company’s short-term assets can cover its liabilities or debts. This is similar to current ratio, but excludes stock, which can sometimes take a long time to sell, or can’t be sold.
A ratio mainly used by potential investors, ‘Gearing ratios’measure a company’s level of long-term debt compared with its equity. Gearing ratios assess how much business funding comes from borrowing and can be used to determine how vulnerable the business is.
· Efficiency
An efficiency ratio looks at, unsurprisingly, how efficient a business is in using the resources it has to produce income. So, the more efficiently a business is run, the more likely it is to generate maximum profitability.
· Profitability
The profitability of a business is shown in the profit and loss (P&L) statement and is an easy way of showing how the business is performing compared with other periods. If your accountant talks about ‘gross profit ratio’, that’s your revenue, less any costs associated to produce it(materials and labour, for example).
Using accounting ratios allows you to quickly compare your business against different periods using the figures on your balance sheet.Neat!
What do I need to know about Key Performance Indicators(KPIs)?
KPIs are a set of agreed measurements or metrics that are useful to measure your company’s success against your targets. KPIs can be financial, for instance net profit or specific growth targets, but can also relate to other areas of the business such as repeat customers or employee turnover, for example.
Benchmarking against sector performance should be something your accountant can provide as they can access data that can give you insights into how well you are performing against competitors.
Should I be looking at cost benefit analysis?
Cost benefit analysis is a way of measuring the financial value or result of a decision, minus the costs associated with it. They could be one off or ongoing costs, and you and your accountant will need to consider that some of the benefits may be intangible – for example improving staff morale - but the analysis should help you evaluate whether to continue with a certain plan of action or not.
Accounting ratios can be used for measuring performance against industry averages, competitors, and your own previous periods. Alongside KPIs and cost benefit analysis, ratios can quickly identify any areas of the business where there could be improvement. Your accountant should be able to prepare these for you and explain how they can be used to help grow your business.
Find out more about the services we offer by visiting our Accounting Services page or get in touch for a no-obligation chat at happytohelp@bluerocketaccounting.com.
