Methods for financial benchmarking (e.g. key financial ratios) Flashcards
What is financial benchmarking?
Involves running a financial analysis and making a comparison of the results in order to assess a company’s overall competitiveness, efficiency, capacity for growth, profitability, solvency and productivity
What are the THREE methods of financial benchmarking?
Internal- compares results of one department / team / individual within organization to another
External- compares an organisation’s statistical data with other organizations within same industry
Ratios- used to gauge the profitability, solvency, and efficiency of a business
What ratios can be used for financial benchmarking?
Value for money ratio
Liquidity ratio
Solvency / leverage ratio
Profitability ratio
Repayment capacity ratio
Financial efficiency ratio
What does the value for money ratio measure?
Ratio of the benefits of a project / proposal, expressed in monetary terms, relative to its costs, also expressed in monetary terms
What does the liquidity ratio measure?
Availability of cash and near-cash assets to cover short-term obligations without disrupting normal business operations
Current ratio which compares current assets against current liabilities
What does the solvency / leverage ratio measure?
Proportion of debt versus equity in a business (e.g. debt to asset ratio)
What does the profitability ratio measure?
Compares business revenues against all costs and evaluates how productively a business is utilizing its resources, both capital and human
(e.g. operating profit margin relates profits realised to income generated)
What does the repayment capacity ratio measure?
Ability of a business to meet all expenses and debt payments (e.g. Term Debt and Lease Coverage Ratio)
What does the financial efficiency ratio measure?
How effectively a business uses its productive capabilities (e.g. Asset Turnover Ratio)
