Five financial ratios your clients need to be in the know on
At WealthCo, we recognize the tremendous value in having clients who are actively engaged in their financial matters. Not only do they benefit from gaining transparency and autonomy over their finances, but it also empowers them to make well-informed decisions about their investments and overall financial health.
Business owners are busy people, but understanding their financial ratios is worth the effort, as it provides a comprehensive picture of their organization’s financial health. InterVal, a business valuation monitoring platform, offers an enhanced way for financial planners to assist their business owner clientele. By leveraging real-time valuation data, InterVal helps business owners make better and more informed decisions, offering rich insights into their financial health. Here, we review six key financial ratios highlighted by the InterVal platform that paint a clear picture of organizational health.
1. Current Ratio
The current ratio is a liquidity measure that compares current assets to current liabilities within a given period. These assets typically include items like cash, inventory, and accounts receivable. Monitoring this ratio can alert business owners to potential issues before they become problematic. While the optimal current ratio depends on the sector, generally, a ratio between 1.5 and 2 is prudent.
2. Debt Ratio
Managing debt is one of the toughest decisions for any business owner. The debt ratio, also known as the leverage ratio or debt-to-assets ratio, is expressed as a percentage. A ratio over 100% indicates a company is heavily in debt. There isn’t an optimal debt ratio for all businesses, but it’s crucial to stay aware of financial obligations and ensure debt is used responsibly rather than excessively.
3. AR Turnover Ratio
The Accounts Receivable (AR) turnover ratio indicates how quickly a company collects its debts. A higher AR turnover ratio means debtors are paying more quickly, allowing the business to operate smoothly without the worry of unpaid invoices. Generally, an ideal AR turnover ratio for most large companies is between two to five days.
4. Inventory Turnover Ratio
The inventory turnover ratio measures how often a company sells off its inventory over a given period. Monitoring this ratio helps ensure resources are effectively utilized and provides insights into stock movement. A low ratio indicates excess inventory, while a high ratio may suggest understocking and missed sales opportunities. An ideal inventory turnover ratio is between 2-6.
5. Revenue to Equity Ratio
The revenue to equity ratio is calculated by dividing a business’s total revenue by its total equity. This ratio reveals how effectively a company is using its resources. A lower value may indicate inefficient resource utilization. Maintaining an optimal revenue to equity ratio of 2:1 or higher helps businesses maximize returns on investment.
6. Saleability Analysis
InterVal also provides a saleability analysis, offering business owners a report that ranks their organizational saleability as green, yellow, or red based on several factors, including:
Business location
Industry
Percentage of revenue generated by the top five customers
Seasonality of revenue
Total employee numbers and functions
Conclusion
Engaging with InterVal and understanding these key financial ratios can significantly benefit business owners by providing valuable insights into their organizational health. If you’d like to learn more about InterVal and Integrated Advisory, or if you have a client who would benefit from a high-level analysis of their business value, please contact us.
At WealthCo, we’re dedicated to helping you make informed financial decisions and ensuring your business thrives.
The Integrated Advisory Community consists of a network of progressive CPA firms, along with best-in-class professional advisors, service, and product specialists, who work together to deliver an elevated and holistic client experience. One that optimizes both their personal and professional lives with an integrated financial strategy designed to help clients reach their goals.