Accounting is a science that aims to understand and analyze the company’s financial position. In recent years, the increasing possibilities offered by modern business management systems (ERP) have resulted in its importance going beyond generating annual accounts, to showing the true situation to investors and as an analytical tool. Information flows are now almost immediate.
One of the departments that can benefit most from these new possibilities is, without a doubt, the treasury. Open banking and the potential offered by banking APIs enable managers to have a more up-to-date picture of the company’s treasury and so prepare its main financial ratios almost in real time.
What are financial ratios?
A company’s balance sheet may not seem to tell you anything at first glance, particularly if you are not an accounting expert. After all, it just provides information on the balances of the company’s general ledger accounts. However, balance sheets contain all the information business managers and investors need to make their financial decisions.
Analysts use financial ratios to simplify all the accounting information. From the mathematical point of view, these ratios show the relationship between two variables. From an accounting perspective, they offer information on the company’s financial situation and, consequently, demonstrate the strength (or weakness) of its management.
The most commonly used ratios in companies are the liquidity, solvency and profitability ratios.
Formulas for calculating the financial ratios
The liquidity ratio indicates a company’s ability to meet its short-term payment obligations. From an accounting point of view, it is the ratio of its current assets to its current liabilities.
Liquidity ratio = Current assets/Current liabilities
If the liquidity ratio is less than 1, the company does not have sufficient capacity to pay its short-term debts and may end up defaulting. If it is higher than 1, the company should have no problem in meeting its short-term payment obligations.
The solvency ratio measures the company’s ability to meet all its debts, in both the short and long term. Mathematically, it is the ratio between the company’s asset and liabilities, after discounting the company’s net equity.
Solvency ratio = Assets/Liabilities
If the solvency ratio is less than 1, the company is technically bankrupt, as the company has more debts than assets to cover them. If this is not the case, the company is solvent. Most experts believe that the ideal ratio for financial health is 1.5.
The profitability ratio measures the ratio of the company’s net profits to the resources used. The most significant of these are the ROE (Return on Equity) and the ROA (Return on Assets). Mathematically, these are expressed as follows:
ROE = Net profit/Net equity
ROA = Net profit/Value of assets
This ratio is expressed as a percentage and is a representative indicator of the profitability of the business’ activity.
The importance of cash flow information being updated in real time
All financial ratios draw on information from the company’s treasury to some extent, as this is part of its current assets on the balance sheet. This area manages and organizes the company’s inflows and outflows of funds (collections and payments), which provide a basis for determining its cash flow and liquidity. The treasury is also possibly the area with the most changes in its day to day activity, due to the frenetic activity of today’s organizations and companies.
This means the information for the company’s ratios differs all the time during the day. This can lead to bad decisions if they are not analyzed using the most up-to-date information possible.
And this happens despite the increasing use of modern ERP systems, which are specially designed to receive and store information in real time. Thanks to these systems, analysts no longer even have to worry about calculating or interpreting financial ratios, as analytics tools do this for them. But there is still a problem: the lag in obtaining banking information.
Banking communication: a P2P model that is not instant
Most banking communication business processes are based on Peer to Peer (P2P) interfaces between the bank and the company’s ERP system, usually through SWIFT channels. This infrastructure delivers all the information regularly, usually at the beginning of each workday, in the statements for the company’s accounts. This information is delivered in a standard format, which in Spain is AEB statement 43.
In this direct communication system, the company’s daily cash flow activity can cause significant changes to the information about the company’s liquidity at the start of the day compared to noon and the end of the day. And an accurate cash flow forecast could be needed at any time.
It is, therefore, important for the bank reconciliation to be performed immediately, so that the accounting information reflects the company’s actual cash position and the financial ratios can be prepared appropriately. But how can this information be received in real time? The answer is APIs.
Banking APIs are the ideal solution for preparing financial ratios in real time
APIs (Application Programming Interfaces) allow direct communication between the bank and the company’s ERP system, without intermediaries. This open infrastructure enables users to request information on their bank account statements whenever they want, in real time.
APIs such as BBVA Business Accounts go a step further, automatically integrating bank account statements into the company’s systems in real time in the standard format in the market, AEB 43. This gives treasury departments an updated snapshot of the company’s real situation through their balance sheets, so they can make better business decisions.
A model that cash flow managers will welcome with open arms. According to the Euromoney Treasury Non-Stop study, 77% of cash flow managers believe that real time cash flow management will have high or very high impact on their business systems, and almost 57% of interviewees plan to use APIs to achieve this.
Given this situation, there is no doubt that more and more companies will adopt new systems to receive their treasury information. This will be a gradual process in which APIs and new developments will play a key role.