Some of you may be thinking that what’s the need of using industry metrics – you know your business and you know how its performing. Competitors and industry peers have their own challenges, own disadvantages and advantages. So, they are bound to perform differently….

In a highly competitive environment, it is extremely important that a business develops a supply chain that gives it the lowest cost advantage, manages its working capital most effectively and fetches the best possible return on stakeholder investments. A business maybe doing well in one aspect but lagging behind in others. How can you find out the best way of doing things and managing finances? Simple, find out the best practices in your industry and try to emulate the ones that are likely to take your business to the next level.

Michael Porter, a leading authority on competitive strategy and international competitiveness, came out with Porter’s Five Force Analysis. As per Porter, two things determine your company’s profitability-the industry in which it competes and its strategic position in the industry. Some industries have inherently low profit potential while others are highly profitable. The most profitable companies have a strong competitive position in a highly profitable industry. The poorest companies have weak positions in weak industries.

As per this strategic management guru, Industry x Competitive Position = Profitability.

Little can, thus, be said about the importance of not just knowing your industry in terms of the manufacturing processes or raw materials but each of the non-financial and financial industry metrics that can tell you:

• Your industry’s past and present performance, and future outlook
• Your industry’s profitability and capital structure
• Your competitive position in the industry
• Your capabilities in terms of cost-competitiveness, revenue generation and growth
• Your performance in comparison to competitors and industry as a whole
• Areas of improvement in your current operations – financial management, supply chain, costing etc
• Industry best practices that have helped the key players in your industry to reach and retain that competitive position

But then why the focus on specifically on financial industry metrics? Companies like Motorola, GE and Toyota, who have been pioneering initiatives like Six Sigma, LEAN and Just in time inventory know the importance of financial metrics and this is highlighted in the fact that any process improvement, quality enhancement or supply chain optimization initiative is considered worthy by them only if it translates into increased profitability, whether by expanding the revenues or shrinking the costs. Financial performance, hence, is a tell-tale of the way the business is managed and stakeholder’s expectations met, and when a business focuses on improving its financial performance, it’ll dive deeper into causal problems that restrain profitability and come up with viable solutions.

At the same time, it can be a real challenge to find information about comparable firms of the same industry to benchmark against, especially for Privately Held Companies and Family Owned Businesses. FINTEL Industry Metrics offer unique and powerful insights into the financial profiles and performance of privately-held companies operating across almost all industries. The information is contemporary and reliable. Receive a comprehensive set of commonly used financial indicators derived using the full set of Income Statements and Balance Sheets of privately held companies, be able to distinguish between small, medium-size and large firms in a given industry and gain the FINANCIAL BUSINESS INTELLIGENCE required to take your business to next level!

It is imperative for a business owner to be ‘on top of things’ and constantly evaluate the performance of the business, irrespective of the size of the business – it could be a small printing business or a mammoth multi-product conglomerate. Business performance, though it may seem great in absolute terms, always has subjectivity involved and it is crucial to compare it industry competitors & established industry benchmarks. It is here that financial ratio analysis comes in handy.
The purpose of this post is to introduce the subject of financial analysis to small businesses, entrepreneurs and young managers, especially the significance of financial ratios.

What is financial ratio analysis?

Financial ratio analysis is the selection, evaluation and interpretation of financial data in easier to understand ratios, which have been identified as critical indicators of financial performance of the business and can be used for strategy and decision-making. Financial ratio analysis is popularly used to compare a firm’s financial performance over a period of time (trend analysis) or to assess performance in comparison to other businesses.

Categories of financial ratios

Financial ratios can be grouped into categories which highlight the various facets of a firm’s financial health and operational efficiency. Some of the categories of ratios are given below:

• Leverage Ratios disclose to what extent debt is used in a firm’s capital structure.
• Liquidity Ratios present a firm’s short term financial situation or solvency.
• Operational Ratios present a firm’s operational efficiency & asset utilization.
• Profitability Ratios indicate the return on sales and capital employed.
• Solvency Ratios measure a firm’s ability to generate cash flow and honor its financial obligations.

In our next post, we’ll take up Leverage Ratios in more detail.