Are my debt repayment terms too hard on cash flow?
• Am I getting behind on my payments to my suppliers?
Asset and debt management ratios:
• Am I buying too much inventory?
• Am I collecting my receivables on time?
• Can I stretch out my payables without causing harm to my supplier relationships?
Profitability ratios
• Are my expenses under control?
• Do I have a lot of excess cash in my account?
• Have my sales dropped and why?
After three or four quarters of tracking your ratios, you will have a much better understanding of your business: its cycles, its cash flow patterns, and its idiosyncrasies. Only once you understand your business on this level can you really start to grow!
Chapter Summary
• Solvency ratios measure your business’s ability to meet its debt obligations.
• Asset and debt management ratios measure how your business manages its resources to generate sales.
• Profitability ratios measure how effectively you are able to use those resources to produce profit.
• Ratios are most useful when compared over time.
Table 1: A Quick Reference to Ratios
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