Current ratios are used to identify financial trends over time for your business. Bankers and lenders use current ratios to analyze the financial health of a business.
In this video…
Knowing how to calculate the current ratio for your business is one of the most important things to understand in accounting for construction businesses. In this video, you’ll learn why they are so important, what they tell you about your business, what your current ratio should look like, and how to calculate the current ratio for your business.
What Are Current Ratios?
Ratios are used to identify financial trends over time. Financial statement ratios focus on three key aspects of a business: liquidity, profitability, and solvency. Bankers, other lenders, and bonding agents use ratios in analyzing your business when they are deciding if they should loan you money or not. Knowing how your business looks to potential lenders gives you an advantage.
What a Ratio Tells You About Your Business
Ratios tell the story of changes in the financial condition of your business. They can help spot trends in your business, and help you compare the performance of your construction business to other businesses.
Calculating the Current Ratio
Current ratio is one of the best measures of financial strength. To find the current ratio, take the total current assets and divide by total current liabilities. A ratio under 1 suggests that the company would be unable to pay its debts. The larger the ratio is, the more liquid the business is. If you’re watching your current ratio monthly, you’ll soon know what rate works for your company, and you’ll be able to take action if the ratio starts slipping.
In the next video, you’ll learn about another ratio, the gross profit margin, and some action steps you can take to continue learning about your financial reports.
Next Video: Gross Profit Margin