In our inaugural topic, we will introduce financial ratios and why they are important. Instead of inundating the reader with a plethora of formulae and calculations, we focus on just three key ratios which are important in this challenging times.
It’s not that the others are not important, but each ratio have its own purpose and we find that these three are more important in this situation. This is a general ratio and each business or industry will have its unique characteristics that may require small tweaks to these ratio. Please do consult your financial advisor for specifics on how to tailor these to your business, if needed.
Introduction to 3 Vital Numbers
Let’s imagine the controls of a plane, with the multiple controls, switches, levers, and gauges. Similar to managing a business? While cruising in perfect weather, this presents no challenge to any pilot. However, as we are now flying through a severe thunderstorm, this may be a challenging condition even for an experienced pilot.
Similar to a business, in times that challenges businesses operationally and financially, there seems to be many things to look at and you may feel like you are swimming in a sea of numbers.
Which ones are important so that you are not “flying blind”? What are the key “gauges” for you to focus on? Why are these important?
Amidst the noise, what do you focus on?
In addition to your daily, weekly or monthly cash flows, we believe that there are 3 financial ratios you should keep an eagle eye on:
(1) Breakeven Point
(2) Cash Conversion Cycle
(3) Cash Buffer Days
Focusing on improving these 3 numbers can help you weather through the storm and put yourself on stronger financial footing.