A key tool for bankers
Bankers will often make financial ratios part of your loan agreement. For instance, you may have to keep your equity above a certain percentage of your debt or your current assets above a certain percentage of your current liabilities.
The bank will do its own review of your ratios to spot any negative trends or underperformance versus industry averages. You must be ready to confidently and credibly address any concerns your banker may have.
Where do I find industry standards?
There are many established sources listing the industry standards for financial ratios. You can use these to compare your business's operating results with those of competitors, and to identify your business' strengths and weaknesses relative to its industry.
While many of these sources are U.S.-based, all provide valuable insight into how well your business is performing in comparison to industry standards.
Your first source should be your banker who can tell you what ratio values are used by the bank.
Consult local sources
Consult your local Board of Trade or the local Chamber of Commerce for ratio values specific to your geographical area, or the industry association for ratio values specific to your industry sector.
Statistics Canada maintains a very thorough library of financial statistics relevant to the Canadian economy, including current ratio values for most industry sectors.
Information on specific financial ratios is available through Statistics Canada’s annual Financial and Taxation Statistics for Enterprises program, the Quarterly Financial Statistics for Enterprises publication and the Small Business Profiles dataset, which presents financial data for small businesses in Canada on Industry Canada's Financial Performance Data website.
U.S data can be useful
Other sources to consider are published by American research companies and widely used by Canadian lending institutions.
Most of these are available at university and larger municipal libraries. They can also increasingly be found online. You can also purchase industry standards reports for your business sector by contacting their publishers.
Annual Statement Studies is published by the Risk Management Association (RMA). Banks use this data as a standard to evaluate businesses applying for financing.
RMA provides balance sheet and income statement data, and financial ratios compiled from financial statements of more than 257,000 commercial borrowers, classified into three income brackets in over 778 different industry categories.
Dun & Bradstreet’s Key Business Ratios on the Web provides online access to benchmarking data. It provides 14 key business ratios including solvency ratios, efficiency ratios and profitability ratios for over 800 types of businesses arranged by industry categories.
Wolters Kluwer publishes the Almanac of Business and Industrial Financial Ratios. It lists 50 performance indicators for 199 industries in all of North America (Canada, U.S., and Mexico).