Starting financial ratio analysis (a little less painfully)

Business Studies is a largely accessible subject for students. Except when it comes to the topic of Finance. This looms large as an insurmountable challenge for many students.

I can understand why students don’t love it. Finance has connotations of complex numbers and maths. It also involves higher order thinking — using the results of the financial ratios to analyse businesses and offer strategies to improve.

Given all this, where should teachers even start?

My approach is to try and get to the heart of why we use financial ratios, which is to tell an accurate story about a business.

First, take a selfie.

Success comes easily after that.

Students often evaluate businesses based on a couple of quick observations and snap judgements. It seems ‘good’ or ‘bad’, but they do not paint a comprehensive picture of the business as it stands.

Financial ratios take the guesswork out of things. They give people the numbers and the evidence to make informed decisions about the true state of a business, encompassing elements such as:

• how good it is at earning profit

• the sustainability of its debt levels

• how well it uses its expenses to drive sales.

So. This is my message to students at the start of the finance topic: we use ratios to tell an accurate story about a business. Moreover, we use a range of ratios to compare businesses on a range of measures and figure out where best to invest our money, or the best strategies to implement to improve operations.

I’ve also created a video, primarily targeted for students, to introduce financial ratios. This could also help in giving students a little more confidence.

Start HERE with financial ratios.