About Managerial Accounting Financial Ratios

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Managerial accounting financial ratios are used to compare a person or businesses cash flow to potential debt. Use financial ratios to determine whether someone will be able to pay back a loan with information from an investment consultant in this free video on finance.

Part of the Video Series: Personal Finance & Money Management
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Video Transcript

Hello, my name's Roger Groh. We're here today to talk about managerial financial accounting ratios. What are they? Well, really, they're rules of thumb that a company or an individual would use when talking about your business and then comparing it to others, meaning, do you have sufficient cash to pay your bills? Is your cash flow healthy, looking forward. Do you have a lot of debt in relation to your cash flow, do you have a little debt in relation to your cash flow? Those are examples. There are many websites which talk about this, one of which, one is the Analyst Exchange. Now I'm a little biased, because I used to teach for the Analyst Exchange. But if you really want to learn, call 'em up and sign up, because it's a terrific way to learn all about financial statements, including financial ratios. Now, if you came to be as a banker, and asked me to loan you money, I would look at all of the payments today that you're obligated to make. Put the potential payment that would also be required if I were to loan you money on top, and then look at your income after tax to determine how many more dollars you have coming in, versus dollars that you already owe. That's called a coverage ratio. And, there is no one right rule of thumb, but, if it were one to one, would I feel comfortable? Probably not. For every...meaning, if every dollar that you brought in, you had to pay out, am I going to feel comfortable? No. If you bring in a hundred dollars, and only have to pay out one of those dollars every month for payments, then I would probably feel very comfortable loaning you money. In business, and example of a financial ratio would be, how many times a year do you turn over your inventory? Meaning, if you're in the automobile business, and you have cars on your lot, if you....if one car sits there all year and does not sell, it doesn't do you any good. It hasn't sold. Whereas, if you can sell that car and buy another, and sell it again, and buy another, and sell it again, and buy another, and sell it again....you're turning your inventory over many times a year. The more turns the better, would be the rule of thumb when it comes to ratios for businesses like that. So those are some examples of financial ratios. And again, if you really want to know more and go into more detail, take a look at the analystexchange.com. Terrific group. They'll help you, and you can really learn the basics of financial management ratios. I'm Roger Groh.


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