Interpreting Financial Ratio actually use simple logic just like understanding fractions. Financial Ratio is usually derived from 2 factors. The first is usually in the top of the fraction called Numerator. The second is usually in the bottom of the fraction called Lower Denominator. A simple way on how to interpret Financial Ratio:
Create Your Personal Balance Sheet
1. Get a big picture of your financial health. Create a Balance Sheet, which reveals your overall net worth at the moment by illustrating the difference between what you owe and own.
2. Locate monthly statements for bank accounts, investment portfolios and other ongoing revenue streams including property rentals.
3. Know the current balance of your personal cash reserves and liquid funds. Create a category called “Income Sources.” Add all of your cash reserves and liquid funds for the year.
- Total your Income Sources column, then write the sum at the bottom of the Income Sources column.
- List every monthly expense in the column, such as property taxes, insurance premiums, car payments and utilities.
6. Start a third column, called “Net Worth.” This column will list the difference between what you own and what you owe, otherwise known as your net worth. This figure is what business bankers look for when reviewing an entrepreneur’s personal financial statement.
7. Subtract your expenses from your income and cash reserves. This is your Net Worth. List this total in your third column.
Create Your Personal Income Statement
1. Begin a new document on a separate sheet.
- Create a column called “Income.”
3. Create a second column on the sheet called “Expenses.” This column will display your total expenses for the month or other pre-determined time frame.
4. Subtract your monthly expenses from your monthly income. This total is your net income. Write the total down immediately following the Expenses column.
Review your Personal Financial Statement
1. Analyze each column in both documents. Look at your monthly income, expenses and net income. These figures indicate how much you earned and how much money you spent from the business.
- Ask yourself questions such as “Am I spending more than I’m earning?” If so, you have a revenue problem to address.
3. Prepare to meet with bankers. Create a neat copy of your personal financial statement snapshot by entering the figures into a spreadsheet application.
- Print, file and wait for your banker to request the statement. Generally you will turn this in with your loan application.
- Ask a real estate appraiser to conduct an annual evaluation of your real estate holdings. This provides the most accurate picture of your overall income situation.
- An entrepreneur’s personal financial statement are good for other needs besides loan applications. These documents can draw attention to issues that must be addressed in order to achieve financial success.
- Accounting software