Using ratios to rationalise your business

Johnson Reed
3m read

At Johnson Reed, we pride ourselves on the speed with which we can come to a decision to lend to our clients. In fact, because we realise that commercial requirements are often needed in a hurry, we’ve gained quite a reputation for stepping in when high street banks have simply been too slow in casting their verdicts. But the more information you can give to us at the outset, the more likely we can come to a speedy conclusion.

One useful indicator for us is the way you measure your business performance. We’re not just talking about your profit and loss accounts here. They’re all well and good for showing your financial results, and from them we can tell whether or not your business is profitable and viable. We’ve been in our business for a long time, and we often think we have a ‘nose’ for people and the businesses they run. But pure hunches aren’t enough. At Johnson Reed, we hold great store in accounting ratios – the numerous ways in which you can measure your success, or otherwise, to help you to interpret the cold financial data in front of you.

Accounting ratios are ways that you can measure one particular aspect of the business against another. It might for instance help you to evaluate how quickly you convert stock to sales. You can do this by establishing the cost of goods you’ve sold, and comparing it with your stock to work out your actual stock turnover. They’re called Key Performance Indicators, or KPIs, and they should be measured at regular intervals to gauge your performance. You can make some interesting comparisons, as well as using them as trend indicators.

You could, for example, refer to KPIs to establish whether your business is profitable in relation to competitors in your sector. Or you can analyse the amount of profit you’re making on new business sales, compared with existing sales. And it’s a useful tool for measuring whether your profit is growing in proportion to the size of your business. But always make sure that you compare like with like. If there’s a significant change in the ratio, it might have a specific reason, so it’s an indicator to take appropriate remedial action. Obviously, keeping management accounts up-to-date is an important aspect of keeping tabs on overall performance.

KPIs also help you to set your goals and targets. There are dozens of parameters that you can assess by keeping a close check on the minutiae of business life. How much is it costing you to fill job vacancies? How many returns do you get from your customers, and what is that costing you in the long run? Maybe you need to reduce the number of mistakes in your production lines. What are the success rates of your business calls? How long does it take you to fulfill orders? Almost all of these crucial business procedures will have finance implications at the end of the day. And at Johnson Reed, we provide finance as quick as possible. So, if you have plenty of answers ready for us, we can use our own business nous to set you on your way – speedily and efficiently.