Business: Ratios, Averages, and Benchmarks

Learn About Ratios, Averages, and Benchmarks

Financial Ratios
A ratio is calculated from two or more figures, usually taken from the financial statements of a company, in order to provide an indication of the financial performance and position of that company. Ratios may be expressed:

• as a percentage (e.g. return on capital employed)
• in days (e.g. debtor collection period)
• as a multiple (e.g. rate of turnover)

Ratios may also be calculated over a period, so as  to enable an analysis of trends to be formulated, or compared to other similar companies or industry averages.

Sources: 
A Dictionary of Accounting- "Financial Statement Analysis"
A Dictionary of Business and Management- "Accounting Ratio"

Other Ratios
Every department in every business produces some kind of information that can be used by its manager to measure performance. This information may be related to operational considerations within the department, the financial condition of the entire company, or the performance of a company's suppliers and customers. 

Source: Business Ratios and Formulas:  A Comprehensive Guide

The words Ratios, Averages, and Benchmarks are sometimes used interchangeably. 

• Benchmarks: basically, the practice of comparing your company's performance against the average performance of competitors in the same industry
• Averages: basically, the data that results from the averaging (i.e. calculating the mean), of any given ratio(s), across multiple companies operating in the same industry
• If you know the averages for your industry, you can benchmark your company's own ratios against your competition.