Pros and Cons Of Financial Ratios
It is often very difficult to gauge the organizational performance from one or two simple numbers . Nevertheless , several different ratios are usually calculated in strategic planning to provide useful information about the organization ' s financial position . Financial ratios are used to assess the company ' s performance relative to specific business operations . They can also be used to review financial performance from separate business divisions or departments .
Pros Easy to use
Most of the businesses use financial ratios because of their simplicity . Organizations typically prepare a month-end financial statement for review by business managers . Financial ratios do not require any additional information beyond the financial statements . Spreadsheet and other accounting software ' s can be used to implement ratios into the business operations without much effort . The software helps generate these ratios automatically once the financial statements are completed .
Provides Benchmarks
Financial ratios often provide benchmark for small businesses . Many business owners use benchmarks to compare their company ' s financial and operational performance with another company or the industry . This comparison helps the businesses to focus on specific operational improvements . Also , business owners can create historical record relating to financial ratio benchmarks .
Cons
Myopic Review Process
Even though ratios provide business owners with useful information , they also have a few disadvantages . Firstly , such ratios provide business owners with a myopic review of their company ' s performance . Financial statements indicate a dollar value relating to business operations . Even if the financial ratios present a positive picture of the business in comparison to the industry standard , internal business operations may be struggling .