What accounting ratio is important to managers and board of directors? why?

Answer 1

It depends on what particular points of focus they have in mind. Accounting ratios are time sensitive; they can only present a picture of the business at the time that the underlying figures were prepared.

Profitability ratios provide information about management's performance in using the resources of the small business.

Liquidity ratios demonstrate a company's ability to pay its current obligations. In other words, they relate to the availability of cash and other assets to cover accounts payable, short-term debt, and other liabilities.

Leverage ratios look at the extent that a company has depended upon borrowing to finance its operations. As a result, these ratios are reviewed closely by bankers and investors. Most leverage ratios compare assets or net worth with liabilities. A high leverage ratio may increase a company's exposure to risk and business downturns, but along with this higher risk also comes the potential for higher returns.

By assessing a company's use of credit, inventory, and assets, efficiency ratios can help small business owners and managers conduct business better. These ratios can show how quickly the company is collecting money for its credit sales or how many times inventory turns over in a given time period. This information can help management decide whether the company's credit terms are appropriate and whether its purchasing efforts are handled in an efficient manner.

Financial ratios can be an important tool for small business owners and managers to measure their progress toward reaching company goals, as well as toward competing with larger companies within an industry. Ratio analysis, when performed regularly over time, can also give help small businesses recognize and adapt to trends affecting their operations. Yet another reason small business owners need to understand financial ratios is that they provide one of the main measures of a company's success from the perspective of bankers, investors, and business analysts. Often, a small business's ability to obtain debt or equity financing will depend on the company's financial ratios.

Despite all the positive uses of financial ratios, however, small business managers are still encouraged to know the limitations of ratios and approach ratio analysis with a degree of caution. As Gill explained, "[Ratios] do not make decisions for you, but will provide information from which decisions may be made."

Answer 2

All accounting ratios are important. Any one ratio does not tell you much. It is the examination of many ratios and their relation to one another that permits an analysis of a company's financial performance.