How can financial ratios help you analyze your company's expense management?

1 Profitability ratios

Profitability ratios measure how well your business generates income from its expenses and investments. They show how efficiently you use your resources to create value for your stakeholders. Some common profitability ratios are gross profit margin, operating profit margin, net profit margin, and return on assets. These ratios can help you assess how much of your revenue is left after deducting various expenses, such as cost of goods sold, operating expenses, interest, and taxes. You can use these ratios to compare your performance with your industry benchmarks or your own goals and see if you need to adjust your pricing, production, or cost management strategies.

2 Efficiency ratios

Efficiency ratios measure how effectively your business uses its assets and liabilities to generate revenue. They show how well you manage your working capital, inventory, and fixed assets. Some common efficiency ratios are inventory turnover, accounts receivable turnover, accounts payable turnover, and asset turnover. These ratios can help you evaluate how quickly you convert your inventory into sales, collect your receivables, pay your suppliers, and utilize your assets. You can use these ratios to identify any potential cash flow problems, inventory issues, or underutilized assets that may affect your expense management.

3 Liquidity ratios

Liquidity ratios measure how easily your business can meet its short-term financial obligations with its current assets. They show how solvent you are and how prepared you are for any unexpected expenses or emergencies. Some common liquidity ratios are current ratio, quick ratio, and cash ratio. These ratios can help you determine how much cash and other liquid assets you have available to cover your current liabilities, such as accounts payable, accrued expenses, and short-term debt. You can use these ratios to monitor your cash flow situation and ensure that you have enough working capital to pay your bills and expenses on time.

4 Leverage ratios

Leverage ratios measure how much debt your business uses to finance its operations and growth. They show how risky you are and how dependent you are on external sources of funding. Some common leverage ratios are debt ratio, debt-to-equity ratio, interest coverage ratio, and debt service coverage ratio. These ratios can help you assess how much of your assets are financed by debt, how much equity you have in your business, how well you can afford your interest payments, and how well you can repay your principal and interest obligations. You can use these ratios to evaluate your capital structure and debt management and see if you need to reduce your debt, increase your equity, or renegotiate your loan terms.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?