Ratios are most commonly used for trend analysis - tracking your business's financial figures over a period of time. Being able to identify trends in a balance sheet will help you manage cash flow more effectively and ultimately enhance the bottom line. Ratios can also be used to see how your company measures up to others in your industry or region.

Use the tips below to get the most out of your ratio analysis:

Create a baseline

In order to identify a trend in your financial situation, you need to create a baseline against which to compare current ratios. This will require an analysis of your past balance sheets. Contact your financial advisor for assistance in creating these baselines.

Compare yourself to others in your industry

Ratios are also useful to see how your business stacks up against similar companies in your industry. Trade associations often offer this kind of data to members. There are also a number of directories that list common ratios by industry, including the following:

• Dun & Bradstreet publishes key business ratios in Dun's Review as well as in its annual "Cost of Doing Business." Call 866-719-7158.
  
  
• The Almanac of Business and Industrial Financial Ratios, from Aspen Publishers uses IRS data to provide ratios for nearly 180 SIC classifications.
  
  
• The Risk Management Association, a national association of bank loan and credit providers (formerly called Robert Morris Associates), publishes annual statement studies containing ratios for more than 225 industries.

Run analyses regularly

Ratio analysis becomes more valuable the more you do it. Scrutinized on a month-to-month or year-to-year basis, these numbers can paint an accurate financial picture of a business' financial performance. By making a commitment to running these numbers regularly, you will be able to identify financial trends early on, allowing you to take appropriate action.

Understand the different ratios. There are different types of financial ratios for different purposes. In general, they tend to fall into three categories:

• Liquidity ratios: As the name suggests, these help measure how liquid a business is. They are commonly used by bankers and suppliers to measure how creditworthy you are. You can also use them to help uncover potential threats to your financial position. Examples of liquidity ratios are the current ratio and the quick (acid test) ratio.
  
  
• Efficiency ratios: These tell you about cash flow, inventory efficiency, and how quickly your products or services sell. For example, you can judge how well collections policies are working by analyzing your company's receivables turnover ratio or your average collections period.
  
  
• Profitability ratios: Ratios such as return on sales help determine if you are maximizing the bottom line. It is most common to analyze these ratios in light of the performance of industry peers.