It seems like there are three types of entrepreneurs when it comes to business statistics. There are the ones who pay no attention to stats at all, fairly obvious to the need to check in on how they’re doing, the ones who make up stats to support their own perceptions of what is going on and the ones who know how to read financial statements and who have solid intel on what is going on in their business.
What type of business owner are you?
There are three types of ratios that most business owners watch.
In this case, ‘financial ratios’ refer to finances. This is whether you have the ability to cover your current and long term obligations. In other words, how is cash flow looking, both right now and in the future?
These type of ratios are also called:
Liquidity Ratios (Cash Flow)
Assess ability to cover current obligations
Leverage Ratios (Long-term Cash Flow)
Assess ability to cover long-term obligations
How is your business doing? Cash is necessary to pay the bills, but what if you’re getting that cash by selling investments and borrowing. If that’s the case, then you can’t last forever. At the end of the day, your business has to make money. There are two types of sub-categories under Operations Ratios.
Assess amount of activity relative to amount of resources used
Assess profits relative to amount of resources used
If you have a publicly traded company or access to other companies and their statistics within your industry, you will want to compare your value per share to others. For most companies, though, the valuation statistic involves looking at the value of your company at specific time period (generally annually) and comparing it to the year before.
In our 4 part course Understanding Financial Statements, we additionally watch two other types of stats: predictive leading indicators for your business, industry and personal economy and business valuation.