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Financial ratios in simple words are the ratios which are used to estimate the efficiency of business operations, solvency of business, company’s liquidity and profitability. These ratios provide insights regarding various aspects of the business which helps the analysts and the investors about the investment prospects and the risk associated with investing in the business. Periodic review of financial ratios is essential to monitor financial health and performance of any business which makes analysis of these ratios a must have skill for business owners.

We will discuss each aspect in which various financial ratios are calculated and analysed. Majorly financial ratios are categorized under liquidity ratios, profitability ratios, solvency ratios, efficiency ratios, and market value ratios.

Liquidity Ratios

Liquidity ratio in simple words is ratio of liquid assets to the current liabilities, if we look carefully at the ratio, we are comparing liquid assets to current liabilities and hence this metric basically tells the about the ability of a company to pay its current liabilities like short- term debt. The preferred value of liquidity ratio is above 1 as it has assets as numerator and liabilities as denominator.

There are three major ratios which are covered under the liquidity ratio which are current ratio, quick ratio and cash ratio.

Current Ratio:

Formula: Current ratio = Current Assets / Current Liabilities

Significance: In simple words current ratio is a ratio of current assets to current liabilities. So, if a company has current assets of greater value than current liabilities it has current ratio greater than 1 and if it has current assets of value lesser than current liabilities than the ratio is smaller than one. A value greater than one for the current ratio means that the company can easily pay off current debt obligations using its current assets.

Quick Ratio (Acid-Test Ratio):

Formula: Quick ratio = (Cash + Accounts Receivables + Marketable Securities) / Current Liabilities.

Significance: As the name suggests this ratio is called as quick ratio as it only covers the assets that can be quickly converted to cash to cover the current liabilities of a company. It is a much robust test of a company’s ability to take care of its current liabilities as it considers only the assets that can be converted to cash in a short period of time like cash, accounts receivables, and marketable securities. Hence it is also referred to as the true test of a company’s liquidity.

Profitability Ratios

Profitability ratios as the name suggests are the ratios which tells about the profitability which can be understood as the ability of a company to generate profit with respect to revenue, balance sheet, costs of running operations, and stakeholder’s equity for a specific time. These ratios help in estimating how well an organisation is using its assets to generate profits and value for the shareholders.

To gain an edge every business needs to how well they are performing compared to competitors in the domain and how much the business has improved in comparison to the past performance reports.

Profitability ratios are of two types which are Margin ratios and Return ratios. These ratios monitor profitability at the cost level of measurement or in terms of returns provided to shareholders.

Gross Profit Margin:

Formula: Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue

Significance: From the formula mentioned above it can be understood as the ratio of revenue that exceeds the costs of goods sold. In simple words it compares revenue with the gross profit. Increasing gross margin can indicate that the company can charge some premium for its goods or services. Decreasing gross margin however indicates the increasing competition in the domain.

Operating Margin

Formula: Operating Margin = Operating Income/ Revenue

Significance: Operating margin in simple words is the ratio of operating income to revenue. Operating income here refers to the money left from sales after taking our costs of goods sold and operating expenses. It is an amazing indicator of the managing operations. A company with good operating margin is usually able to absorb damage in profits due to slow economy.

Pretax Margin

Formula: Pretax Margin = Earnings Before Tax/ Revenue

Significance: From the formula mentioned above we can analyse that the Pre tax margin is the ratio of earnings before tax and revenue. It quantifies how much profit a company generates before paying the taxes to the government. It reflects the impact of management decisions as pretax margin is about the before taking out taxes.

Net Profit Margin:

Formula: Net Profit Margin = Net Profit / Revenue

Significance: This metric is basically used to estimate net profitability of a company as it deals with the profit after taking out every expense and taxes from the revenue. From the formula mentioned above we can observe that it is the ratio of profit to revenue for a given time period. It gives the estimate that how much profit a company makes after generating a particular revenue value.

Return Ratios:

Return ratios in simple words are the ratios used to compare total income with the assets, equity, and invested capital for a business as this comparison provides insights regarding the efficiency of a company to convert the invested capital into profit for shareholders. Return ratios are directly correlated with the capability of a business to manage investments. The capability of a business to generate returns efficiently for shareholders and investors which is quantified with return ratios drives investors and shareholders to invest capital in the business.

Return on Assets (ROA): Formula: Return on Assets = Net Profit / Total Assets

Significance: Return on assets in simple words is the efficiency of utilization of assets to generate the profit observed in a given time. It is calculated to estimate how well a company can use its assets to generate returns for its shareholders.

Return on Equity (ROE):

Formula: Return on Equity = Net Profit / Shareholder’s Equity

Significance: This is an important metric for the shareholders as it quantifies profit earned against the shareholder’s equity. High return on equity is a good sign for investors as it indicates that the company is able to generate cash and do not have rely on debt to generate profits.

Understanding financial ratios not only helps in managing finances related to business efficiently but also provides insights regarding operations, sales, business strategy, and reputation among shareholders. Smart investors go through these numbers before making investment decisions as financial ratios describe the overall condition of a business and provide an estimate of risk associated with investing in the business.

Cash flow statement in layman terms is a statement of a company’s cash flow in a particular period. The word cash flow refers to the flow of cash into or out of the business. In simple words if flow of cash is more in to the business we can conclude that the business is financially doing well. Cash flow in to or out of a business is created basically by three mechanisms which are operations, investing and financial activities. Understanding cash flow statement is important in order to estimate liquidity, solvency of business and financial flexibility.

Financial statements provide complete information about a company’s finances. Balance sheet provides information about what a company owns and what a company owes. Income statement shows how much money has been made and how much has been spent. The cash flow statement connects the strings by actually tracking how much cash has entered and how much has left in a specific period of time.

An ideal approach to understand critical aspects of the cash flow statement would be to understand its components, analysis and impact on decision-making. We will cover each aspect in detail which enable you to conceptually understand the cash flow statement.

Key Components of the Cash Flow Statement

Cash flow statement is divided mainly in to three sections which are actually the modes in which a business can generate cash which are operating activities, investing activities and financing activities. We will cover each section starting with the operating activities.

Operating Activities

In layman terms cash flow for operating activities provides the information about where the cash is coming from and where it is going. From this part of the cash flow statement information about efficiency in utilizing the capital for business operations can be estimated.

Cash Inflows: Cash inflow obtained from selling goods and services, recurring amount from royalties, fee charged for services, commissions in sales or products and other cash flows which are basically obtained from business operations are included in the cash inflow due to operating activities.
Cash Outflows: The outward flow of cash for suppliers, business operating expenses, salary for employees, interest payments on debt, income tax etc. are included cash outflows for operating activities.
Net Cash Provided by Operating Activities: Net cash provided by operating activities can be calculated by difference of cash inflows and cash outflows related to core business operations. However, the most widely method is to add net income from the Income statement, adjustments in the working capital and non-cash items like depreciation.

Net cash provided = Net Income + Adjustment in working capital + non-cash items

Investing Activities

Cash flow from Investing activities simply refers to the cash flow resulting from buying or selling assets. Buying and selling of assets can provide a lot of information about how a business plans to expand or grow in future.

Cash Inflows: Inward cash flow from sale of property, plant, and equipment, sale of investments is considered positive cash flow or cash inflow from investing. Selling assets creates positive cash flow for investing activities.
Cash Outflows: Cash flow outward for purchasing assets like property, land, equipment, investments, and loans given to others is included in the cash outflow. Buying assets creates a negative cash flow for investing activities.
Net Cash Used in Investing Activities: Net cash used in investing activities is simply the difference between cash outflow and cash inflow related to acquiring or diluting any kind of asset or investment which will give returns in future. It is really helpful in estimating a company’s future moves regarding expansion and financial health. If a company’s net cash used in investing activities is negative it means that the company is investing in creating assets and if the value is positive this means that the company is selling or capitalizing on investments for strategic reasons.

Financing Activities

Cash inflow and outflow refers to the flow of cash into or out of the organisation from financial activities which include issuing equity, borrowing funds, repayments of burrowed funds, paying dividends to shareholders or repurchasing the company shares.

Net cash used in financial activities is also just the difference between the cash inflow and cash outflow due to the company’s financial activities related to the business operations and expansion.

Net Increase (Decrease) in Cash and Cash Equivalents

Net increase or decrease in cash and cash equivalents is defined as the total cash used operating activities, investing activities, and financing activities which describes a company’s overall position regarding cash for the period for which the statement is being prepared. Cash and Cash Equivalents at the Beginning and End of the Period

Cash equivalents in layman terms refer to assets that are equivalent to cash at hand. These are assets which can be converted into cash within a time period of 90 days. These include any asset that can be liquified into cash within 90 days.

Importance of the Cash Flow Statement

Liquidity Assessment

In simpler terms cash flow statement provides a complete view regarding a company’s cash flow which is directly correlated to a company’s ability of maintaining liquidity and meeting short-term obligations.

Financial Health

Cash movement is an extremely important parameter for estimating a company’s financial health. This parameter is an exclusive feature of cash flow statement and is not provided by the Balance sheet and Income statement.

Investment Decisions

Cash flow statement is the statement to which investors and financial analyst usually refer in order to evaluate a company’s financial stability and potential for growth in future to make investment decisions.

Operational Efficiency

Net cash flow from operating activities is used in evaluating the operational efficiency of a business and cash flow statement is used for this purpose. It is analysed and reviewed frequently by management and stakeholders.

Analyzing the Cash Flow Statement

Cash Flow from Operating Activities

If your company is doing well in operations and is generating cash while satisfying its short-term obligations this means that you are effectively using the working capital and your cash flow is positive.

Cash Flow from Investing Activities

Negative value of cash flow from investing activities indicates that a company is investing in creating assets to plan for the future but excessive cash outflow can impact the current liquidity of a company.

Positive cash flow from investing activities indicates that a company is actually selling assets to create cash flow and hence is a concern as any company would sell assets to maintain operations when it is not generating cash from business operations.

Cash Flow from Financing Activities

If a company is taking debt from the market or is providing equity to raise money to either finance its operations or expand its presence cash is actually coming into the company and hence cash flow would be positive.

Negative Cash Flow: Could suggest that the company is repaying debt, paying dividends, or repurchasing shares, which might impact its liquidity.

Cash goes out of the company when it is repaying creditors, paying dividends to shareholders, or purchasing its shares from the shareholders, hence the cash flow would be negative. Reducing debt improves financial health but excessive cash outflow can impact liquidity.

Free Cash Flow (FCF)

Free cash flow can be understood as the cash flow available to repay debt, pay dividends, and invest in growth opportunities after taking care of expenses. It is cash flow from operating activities minus the capital expenditures. A positive free cash flow reflects that your business is financially flexible however a negative free cash flow that you are either struggling to make ends meet or are just able to make ends meet in your business.

Cash flow statement is an amazing tool to evaluate operating efficiency, capital management and financial health of a business. Cash flow statement not only helps in tracking the cash flows but also helps in making strategic adjustments to ensure stability and solvency of any business. Analysing cash flow statement is must have skill whether you are an investor, analyst or a business owner.

Businesses are run in order to make profit and income statements provide a comprehensive insight about the profitability by focusing on revenue, expenses, gains and losses for a specific period. Analysing Income statement for a specific period can provide information about the efficiency of business operations, management, underperforming areas of business and business position with respect to its competitors. Income statement is also known as Profit and loss statement. Understanding what income statement is, how it is made, what impact it has on business can help in strategizing operations and increase profitability.

Key Components of the Income Statement

1. Revenue (Sales)

Gross Revenue: Gross revenue is the total money a company has made in a particular period before subtracting expenses by providing goods and services to the customers and clients.
Net Revenue: Net revenue is gross revenue minus the returns, refunds and discounts. It is what a company has actually made.

2. Cost of Goods Sold (COGS)

Cost of goods sold (COGS) is the net cost associated with producing goods or delivering services like raw materials, labour costs, manufacturing overheads, service management costs etc.

The formula for COGS is:

COGS = Starting Inventory + Purchases – Ending Inventory

3. Gross Profit

Gross profit in layman terms represents the net profit and is an indicator of efficiency of a company’s production and sales. It is calculated as a difference between cost of goods sold (COGS) and net revenue.

Gross Profit = Net Revenue – COGS

4. Operating Expenses

The expenses in maintain day to day operations is called Operating expenses these expenses include:

Selling, General, and Administrative Expenses (SG&A): These expenses include staff salary, office utilities, rent for office space and marketing expenses.
Depreciation and Amortization: These are the expenses allocated to the non- tangible assets during the time of their use. It is a very important aspect while considering operating expenses as most people miss out on these expenses.

5. Operating Income (EBIT)

Operating Income which is also known as Earnings before interest and taxes (EBIT) is an excellent metric to measure a company’s profitability in its core business operations it is simply the difference between operating expenses and gross profit for a particular period.

Operating Income= Gross Profit – Operating expenses

Non-Operating Items –These include all expenses and revenues which are not linked with to the core business operations such as interest income, debt interest expense, gains or loses from investments not related to the core business.
Pre-Tax Income –
- As the name suggests it is company’s oncome before the taxes are taken out. Mathematically pre-tax income is operating income plus the non -operating items for the business.
- Pre-Tax Income=Operating Income + Non-Operating Items
Income Tax Expense –It is the amount of tax a company pays based on its pre – tax income.

Net Income
- The most important metric to evaluate a company’s financial health is Net Income. In layman language it is a company’s profit or loss after taking out all deductions including expenses and taxes from total revenue.
- Net Income=Pre-Tax Income−Income Tax Expense

Importance of the Income Statement

Performance Evaluation: Evaluating performance of a company means measuring its profitability and operational efficiency. It is very important for the stakeholders and investors to review a company’s performance before making the important decision to invest in the cause and that is where Income statement is really useful as it provides the clear picture about profitability by calculating a company’s net income.
Decision Making: The benefits of precise analysis of income statement are not limited only for the investors to assess risk associated with the investment. Income statements are really useful to decide whether to go for expansion or cost- cutting. If execution of an existing operating strategy is not generating satisfactory results it will be reflected in the income statement and strategic changes can be made accordingly to the operations to generate more satisfactory results.
Financial Planning: Budgets are created by using the forecasted data which is again based on analysing past income statements. The future budget is a reflection of expected future performance which can be efficiently predicted by using income statements. Hence analysing income statement in essential to create an effective budget which aligns with the financial goal of the organisation.
Compliance: It is mandatory for a public company to maintain transparency and compliance with the financial reporting standards. Hence it is an essential requirement for the public companies to file income statements with regulatory bodies.

Analyzing the Income Statement

Trend Analysis: Income statement can be used to analyse trends by doing a comparative analysis over multiple periods find trends in revenue, expenses and profitability to highlight the areas which are showing improvement and to find areas which require improvement.
Ratio Analysis: Income statement is the key source to calculate financial ratios like gross profit margin, operating margin and net profit margin. By getting insights about these important ratios strategic changes can be made to improve efficiency and performance of the business.
Comparative Analysis; Comparing the income statement with the industry competitors enables the business to do efficient and effective benchmarking regarding business performance. Not only in benchmarking income statement also helps in identifying competitive strength and weakness of business as compared to competitors.
Segment Analysis: Income statements when broken down as per the business segments or product lines can reveal which segments or product lines are profitable and which segments or lines require improvement.

Conclusion

Analysing Income statement reveal the complete picture regarding a company’s operations and financial health. It is not important for only for the purpose of improvement in operations but also for the investment purposes. Analysing Income statement is crucial also for doing the fundamental analysis of the company before making the decision to invest in its stock. Therefore, analysing income statement is a must have financial skill for everyone.

Saving money can be tricky these days. There are many day-to-day expenses which might seem insignificant, but can consume a significant amount of your income. The task of mitigating these expenses can seem daunting if you look at these expenses these altogether at once. The small everyday expenses can really dig a big hole your pocket cumulatively and can have adverse impact on your savings, investment plans and future prospects by triggering a cascading effect and by developing unhealthy spending habits.

A little bit of understanding and management of these daily expenses can stop the excess leakage of your money and accelerate your journey towards your goals. Let us address some these one by one and here are some suggestions on how deal with these.

Differentiate between needs and wants!

Thinking and prioritizing your needs can streamline your expenses and reduce the urge to spend that you do not need right now. It does not mean that you have to live the life of a miser, it simply means that you have to prioritize the expenses at every stage of your life put your needs ahead of your desires until you reach a stage where you are financially free to get what you want. In other words, exercise the principle of “forced scarcity”.

Consider creating a Budget

It might sound boring and old school but there is a strong reason why this habit is one of the most common habits of financially independent and successful people. Let us start understanding the importance of the complete by a very simple and effective analogy, consider a simple activity for example vacation we will be discussing importance of planning and budgeting with this activity. The very first thing that you need to decide is where you want to go, followed by the decision how you would be going, then how much time and money you need to get everything sorted and arranged for a vacation. Now in the exact same way anyone can decide what are their financial goals, how much money they can afford to spend each month to achieve their goal in the time which they have fixed to reach that goal. You will notice this little analysis of your present financial status and the status that you want to get will bring a positive change. You will at least start to look for information, the answers how you can do what is required to be done.

Understand money

Again, you all must be wondering we know money is something we get in return for the work we do. Be rest assured this is the middle-class trap that most people will never be able to get out of. Reality of money is completely different than what we know. Have you ever wondered why some people are so good in creating wealth regardless of education and skills they have. Fact is intellect can be a source to create wealth but getting rich and financially free requires the understanding of how money is circulated, how value of certain things increase exponentially, how trends change and are generated in the society about certain products, commodities and services. If you understand these details well congratulations you are ahead in this race. Learning about finance and economy can provide you an extra ordinary advantage in wealth creation.

Let us start with the small changes that you can make in day-to-day routine to wise use your money and increase your savings:

Try home entertainment instead of Date Night or Night Out!

Try to limit the outdoor adventures with your spouse and family and organize home entertainment on weekends, this will cost a fraction of those outdoor adventures and will bring the feeling togetherness as well. You will find that being together at home and enjoying homemade food with a game or a movie on your T.V can be better than that noisy and crowded night out.

Cut outdoor lunches during weekdays!

It might not seem effective at the beginning as you have to put some effort in preparing your lunch but consider a saving of 10 pounds to 20 pounds per day multiplied by your workdays in a month. This will definitely be 30 to 40% of your monthly rent or your mortgage. The satisfaction that you will get by preparing your meals yourself is truly unmatched.

Use carpooling or public transportation to commute to work!

This one habit will some you at least 20 – 30 % of your monthly expenses as we all know prices of gas increasing at a rapid rate and you will also get some time to read or get a power nap during commuting to office. You can also use the time to plan for your workday during travelling.

Organize your grocery shopping!

The main reason to earn is to survive and for that everyone needs food so the this is one expense that you can not eliminate however you can track, optimize and use smart inventory management to not only mitigate the expense but also to keep your self healthy. Looking for “buy one get one free” offers on your grains and greens can not only save the hard-earned money but can also help in storing larger number of essentials each month. You can also track the consumption to plan the quantities that you might need each month for each category of groceries that you buy.

Give yourself a target for saving and investing each month!

This has to be a priority as soon as you receive your pay check each month no matter how small is the amount for each of the category but there has to be an amount that you must allocate towards your saving and investments. Remember consistency is the key here. Once you are disciplined enough in these two departments try to allocate a percentage of your income each month for savings and investments this will give you a financial edge in near future to make decisions that other people would be dreaming about. Remember it has to be you who would take that first step in your journey towards financial freedom. So, “keep calm, keep saving”!

Just like the digital transformations of our day to day lives retail banking domain has also changed drastically in recent years and to be honest this evolution is just speeding up each year. From personal interactions to smart banking solutions retail banking has come along way in recent years. Technology has completely transformed various aspects of retail banking like managing your account, keeping track of transaction, sensing your financial needs and coming up with new offers for them. Every account holder must stay updated with these services to take complete advantage of these technical advancements in retail banking.

The Traditional Banking Era

If you would have to create a picture of a bank in its working hours, how would you visualize it? The very first thing that will come to your mind would be people standing in long queues, then you would picturize separate counters for cash deposits, cash withdrawals and officials dedicated to process loan applications sitting at their desks and helping customers with the information regarding the same. Now this scenario has drastically change by the development of internet banking, mobile banking, artificial intelligence and machine learning. Now, we all have faced issues like long delays, less efficient service, very poor accessibility of the banks at least once a decade ago in our experience with banking services offered the banks.

The Dawn of Digital Banking

First transformation in the retail banking came around with the outburst in the web bubble when banks started online accounts in later half of 20th century. This one development in the technical domain enabled customers to gain insights about their accounts, process their payments, transfer their funds instantaneously from the convenience of their house. This advancement increased consumer experience, cost reduction, efficiency operational and customer reach outside their physical branch network.

The Rise of Mobile Banking

Mobile technology played crucial role and is taking retail banking to new heights in terms of personalized customer experience. This development made on the go banking services possible. Development of mobile applications enabled the customers to make transactions instantly, access information instantly regarding their account, get customized offers as per their financial history and most importantly having access anywhere and anytime.

The Digital Banking Revolution

Dynamically changing customer behaviour, accelerated technological advancements and heightened competition from emerging fintech businesses led to the birth of Digital Banks. These are the banks which can be considered as virtual version of the retail banks which provide complete banking services as provided by the retails but without the need for a physical bank location. These digital banks help banks to cut the cost of operations and provide 24/7 banking services throughout the year. Digital banks provided customized and uninterrupted banking services to the generation of the customers which is more tech savvy and require quick resolution of their banking issues.

The AI Uprising in retail Banking

Artificial Intelligence has transformed operations of every industry today and banking industry is not an exception in this transformation. It has enhanced customer experience, optimized operations and improved risk management drastically. Banking industry has been revolutionized by the intervention of artificial intelligence in major aspects of retail banking.

Enhanced Customer service

Banking services are all about the satisfaction of the customers as it is people’s money which is managed and trust of customers in the services provided a bank is the deciding factor in any bank’s success. AI empowered chat bots and virtual assistants are providing services beyond simply answering customer’s queries. These bots and assistants which are based on machine learning models can not only resolve issues and queries but can efficiently provide recommendations-based customer’s preferences and consumer behaviour patterns. On the server side these machine learning models can effectively anticipate customers needs, predict future financial needs based on data from various sources and customers credit history. New marketing campaigns can be accurately designed to reach out to cater modelled needs of customers.

Accelerated Operations

Fraud Detection and Prevention:

It is just amazing that how AI based models can detect patterns real time that indicate suspicious activities empowering banks to identify and prevent fraud, security threats and money laundering activities much more efficiently than traditional rule-based systems.

Credit Scoring and Underwriting:

When it comes to money decision making for lending is of prime importance for banks. The efficient and accurate models generated by using artificial intelligence can prove a game changer in calculating credit scores to assess credit worthiness of applicants. This accuracy helps in improving decision making for lending processes hence mitigating the risk for defaults and delinquencies.

Process Automation

Iterative banking tasks such as data entry, documents processing and account reconciliation can be automated easily by robotic process automation and integration of artificial intelligence can boost this automation in terms of speed and efficiency. This gives banks an edge in allocating human resources to more value addition activities and hence provides cost saving in operations.

Risk Management and Compliance:

Market Risk Analysis

With the exceptional ability to integrate data from various sources AI driven algorithms can analyse market data along with various present economic indicators to assess market conditions so that the new trends can be identified. The analysis of these trends can help banks in optimizing investment strategies which helps in reducing risks associated with investments.

Regulatory Compliance

Automated compliance monitoring and reporting ensures the compliance with the regulatory requirements for banks. It helps banks to stay compliant with the regulations like anti- money laundering, Know your customer, and data privacy. Being compliant reduces the risk of penalties which is indirect cost saving for the banks.

Cybersecurity

Customer data protection is the utmost priority for the financial institutions and AI powered cyber security solutions can prove excellent as these algorithms can detect and mitigate threats like malwares, phishing attacks, by analysing network traffic, user behaviour and system vulnerabilities in real time which enhances the resilience and integrity of banking systems and data.

Artificial Intelligence has proved nothing less than a boon for various sectors and banking sector is not an exception. Artificial Intelligence has not only increased efficiency and accuracy for the banks but has proved exceptionally beneficial for safeguarding customer data and mitigating financial frauds. It has been successfully able to transform the issue resolution aspect of the banking and financial services. We can hence say that AI revolution has bridged a substantial gap between the banks and their customers and has proved to be asset for the society as well.