What are Business Ratios?

Ratios are important financial analysis tools that help determine profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Ratios report primarily on past performances.  However, ratios can be predictive as well because they can point to potential problem areas.

Trend analysis is when ratios are compared over a period of time.  Trend analysis is useful to determine patterns in a business.  They are also used to compare one business to another business, both inside and outside of an industry sector.

In comparing trend analysis between financial periods or between companies, keep the following 4 points in mind.

• Make an allowance for changes in accounting policies that occurred during the time span being examined.
• Take into consideration material differences in accounting policies between a company and industry norms.
• Know the types of accounting policies used. Different accounting methods can result in a wide variety of reported figures.
• Determine if ratios were calculated before or after adjustments were made to the balance sheet or income statement, such as non-recurring items and inventory or pro forma adjustments. Adjustments can significantly skew the ratios.

Ratios and High Risk Processing

Business ratios are an important consideration when underwriting a high risk merchant account. Particularly high volume merchant accounts.

Underwriters routinely check business ratios when reviewing a high risk, high volume account.  The results are important for account approval.

Underwriters use ratios to confirm that the business is in good financial shape.  And has the resources required to cover contingent liabilities from chargebacks.  

Conclusion

When applying for high volume, high risk merchant accounts, business financials are often requested. Underwriters run the business ratios to be confirm the company has the financial strength to support the processing volumes requested.

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