Managing finances is the most critical part of running any business. Still, it appears that the financial liquidity ratio is the most crucial one when it comes to measuring working capital performance. It allows a company to measure its capacity to meet short-term obligations, which include paying salaries (or wages), utility bills, income taxes, or lease payments. In other words, this ratio is critical for indicating the business’ financial health, considering that it signals when the company is losing money instead of earning it.
Furthermore, the profitability and performance of any business are easy to measure using trend analysis or ratio analysis. Even though the purpose of both examinations is relatively similar, they differ in the ways they are performed and further calculated. In fact, trend analysis aims at predicting a company’s measurements based on recently observed data (Carlson, 2022). It can be used to examine sales patterns for a decline that customers, products, or sales regions may cause (Carlson, 2022). The ratio analysis focuses on estimating the relationship between particular measures to understand how they impact each other. Thus, the first option is used to recognize the areas that need improvement for increasing revenue, and the second is beneficial for evaluating the performance depending on particular measurements.
Overall, trend analysis is a beneficial tool for any business since it is critical to measuring profitability and, in turn, the performance of a company. Predictions regarding the revenues or expenses in the next quarter can signal the financial mistakes that may be made by the business (Carlson, 2022). Consequently, the control of funds is adequate, and a company can adapt its budget decisions satisfactorily by using trend analysis to predict the following measures of revenue and net income.
Reference
Carlson, R. (2022). What is financial ratio analysis? The Balance.