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What we're going to suggest really isnt rocket science. It may seem so at first, but once you get the concepts down, and get a little practice under your belt, it'll be easy. It just bears repeating or pointing out because sometimes the obvious is the last thing we do.
Now, whatever accounting software program you're using you are running your books on a computer program, arent you? Good. We thought you were, but it never hurts to ask. Now, whatever accounting software program you're using, look for the analysis tools in the main menu or in the help index. Most of the time, accounting programs will have some form of comparison tools. Generally, programs will have at least a month-to-month comparison function. And, if it does, it should also have a year-to-year comparison as well.
Even if your software provides month-to-month and year-to-year comparisons, it may or may not provide for calculation of all of the ratios you want. It may not even provide the basic ratios. Dont be fooled by the purchase price either. Some relatively inexpensive software programs contain financial ratio options just like some of the more expensive program. And, conversely, sometimes the expensive programs dont have the ratio analyses built-in. It really depends on what the software was designed to.
If your software doesn't have built-in calculators, we suggest you investigate report writer software. Crystal Reports Report Writer is a very good example of a report writer program that integrates with a wide variety of accounting and other off-the-shelf programs. (This is not an advertisement. Crystal Reports is just the most popular and one of the most comprehensive report writer programs.) Be careful, though. Make sure you get the version of Crystal Reports that works with the version of whatever software you're using that you want to integrate with. Also, be aware that oftentimes when a software manufacturer updates their programs, the database structures change. This will affect how you set up Crystal Reports. Still, even with the setup hassles, report writers are powerful tools that can more than pay for themselves.
Dont want to fool with a new program? We don't blame you. How about using an older, tried and true method called a spreadsheet? Many times, data can be exported out of your accounting program into specified spreadsheet formats (Excel, Lotus ...). Even if there isnt a direct export, you can usually save your data to a file that the popular spreadsheet programs can read. Once you've performed the export, it should be a simple matter of importing your data into a spreadsheet set up to automatically calculate the ratios you want.
Lets seem what if ... you looked at your accounting program and it can't do what we hoped it could do, and Crystal Reports wont work for some reason and accounting hates the spreadsheet idea because you're forever changing accounts. That leaves only two choices either enter the data directly into a spreadsheet or calculator, or find some third party to do the calculations. We suppose there is a third possibility, which is to forget about this whole ratio business altogether, but then you wouldnt need to read the rest of the article, so we'll assume you're not taking this option.
To find another alternative for you, we took to the Internet. And, voila, we found lots of sites out there for the very purpose of distilling ratios from piles of numbers. The Internet comes to the rescue again. And, as with anything, some were better than others and we are limited on time and space. So we will present only a few, which we think, are the very best. Therefore the list below is by no means exhaustive and we in no way endorse or detract from any of these services.
American Express Small Business Network Interactive Tools is a good place to find interactive calculators for some of the more common ratios. In addition, it also provides good definitions for each of the ratios.
The Ratios for Financial Statement Analysis web site is primarily educational since it doesnt have calculators. However, it provides excellent definitions to help you understand and build a spreadsheet for the basic calculations.
The University of Washingtons library also provides a Financial Ratios Calculator page, which allows you to compute the major financial ratios.
These are only a few of the many pages where you can find either the calculators themselves, or definitions of various ratios, which may be useful to you. However, the one thing they do not provide is industry statistics. If you plan to compare your figures against your peers, you'll either need to find information from a trade association for your industry, or purchase one of the popular ratio guides. Two of the more popular guides are the Almanac of Business and Industrial Financial Ratios from Prentice Hall and Annual Statement Studies produced by The Risk Management Association. Both of these publications have their strengths and weaknesses, so taken together they will probably provide you with all the information you need. The Almanac of Business and Industrial Financial Ratios can be purchased online at various online sellers.
As we said in the beginning, the calculation of financial ratios is simple once you have the formulas. The resources mentioned in this article, as well as many others on the Internet, are available to help you make the most of the financial information you receive. A vital resource we havent mentioned yet is our staff. We have available for you the people with the training and experience necessary to help you make sense of those sometimes baffling reports you get. Please dont hesitate to pick up that telephone and let us know how we can assist you.
Have a great February!!!
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.