Financial ratios are established parameters that will help you determine whether your business is financially successful. The use of financial ratios should be part of your strategic planning process. Establishing a solid financial reporting system provides you with the information you need to manage your business, but the key is to remember that ratios are long-term indicators best measured over a period of time. They only point you in a direction. They are the map not the territory.

There are two main types of financial ratios:

Current ratios (current assets over current liabilities) often used as a means to judge a company’s ability to meet short-term obligations and remain solvent in the event of adversities (Remember Murphy and his law?)

Debt coverage ratios (annual cash flow before interest and taxes) shows lenders that you can adequately meet interest and principal payments