I'm a big fan of small business owners' rate analysis. I do not need to inspire large business CFOs and controllers to make a rate analysis because they are everyday bread, but I find that many small businesses have not yet evaluated how much financial indicators they can make.
But as far as the rate analysis can help, you may mislead, so I thought the limits of financial ratios would be good today.
The ratio analysis can only be as good as the underlying data
The proportions are absolutely wonderful. Compound multiple numbers and links to a simple 1-digit or 2-digit number that tells you volumes! But beware … What if these complex, underlying data are not accurate? There are a number of important decisions because the ratio has changed by 1 or 2 percentage points. Given that your accountant is more confident that the calculations can rely on it.
In a small business environment like a balanced trial (yes, not just bank accounts) and monthly revised financial statements can not be accepted as specified. Many small businesses do not have the right accounting system and not all have the relevant accounting staff to ensure that monthly financial results are not only available but are actually accurate
Calculating figures on questionable data and an incompatible volume can be very dangerous. So, before attempting any analysis, accounting records can only be compared between
and . Comparison of ratios can only be significant if the data is indeed comparable
even in the industry. Different depreciation methods, different valuation methods, and various policies related to the capitalization of individual expenses make the interpretation of financial statements very difficult.
But at the same time, comparisons of different periods may be equally difficult. I've seen a number of small businesses that were heavily trafficked at the accounting / accounting position, and the general ledger's review often revealed that there was not much consistency with many customers. This would make the comparisons less appreciated than otherwise. This leads us back to the first point – accounting records must be not only accurate but also consistent
The ratio analysis only reflects the financial statements
It is obvious that financial indicators only reflect the company's financial statements. And as valuable as it may be, it does not include factors that can greatly influence your business and can not be quantified or expressed in accounting terms.
I remember that part-time CEO of an insurance company bought by an international player. The chairman was given a certain amount of interest as the wage costs of his accounting department. From this ratio, he could not add a single person to his accounting staff. On the contrary, you have to let some people first get to the goal.
But this did not take into account the special situation that this company came into. For historical reasons, the staff had very low qualifications, the systems were old and the only way to create a strong day-time or CFO to re-organize the class. The target ratio does not allow. But that was the best thing in such circumstances. Smart management recognizes such limitations of proportions and the right business decisions.
Other factors not included in the financial statements may be technological developments, competitors' actions, government actions, etc. should be evaluated when making important decisions, not just financial indicators.
Yet financial indicator analysis is a key element of these decisions, and I would like to say that a company that does not use this information is disadvantageous.