by Jeff Semple | Operations

Ratio analysis is a useful tool for business owners to evaluate the financial performance of their companies. However, it is not the calculation, but rather the interpretation and comparison of the data that makes these ratios an effective barometer.

Here are three tips to maximize the effectiveness of ratio analysis with your business.

Understand your purpose. When comparing data from the first quarter of this year to the first quarter of last year, focus on that. Do not try to measure everything but decide what is important to helping you run or improve your business. Use the information to see how you stack up against the competition or industry, avoid digging into your own performance and stay focused on the task at hand.

Consider inflation. When reviewing historical data, you need to account for inflation. If it takes more cash to buy the same amount of your product, you need to make the adjustment to get a valid comparison. Study the ratios relationship to revenue or expenses to make sure your allocations are appropriate.

Avoid the lingo. Not everyone in your company is a financial guru, and they don’t have to be to understand what the data is saying. Use plain language in ratio analysis reports so everyone knows what they can do to make an impact.

To learn more about how good ratio analysis practices can help your business, call (330) 412-5872