FINANCIAL RATIOS FOR A BUSINESS

Financial ratios is a good tool to determine the performance of a business. It assist you to evaluate your business and will point out matters of interest or concern.

Here are some of the common ratios.

1. Current ratio: Current assets / Current liabilities

To discover the surplus liquid funds that are available. The higher the value the better. The norm is two (2) and means that the liabilities are covered twice by the current assets.

2. Quick ratio: (Current assets - Inventory)/ Current Liabilities

This ratio shows the ability of the business to pay current liabilities out of assets which are either cash or quickly convertible into cash. The higher the value the better. The norm is one (1).

3. Accounts receivable days: Accounts receivable x 365 / Yearly turnover

The ratio shows the average number of days it takes customers to pay their accounts. An increasing value indicates an inefficiency in collecting outstanding debt, whereas a decreasing value indicates an increase in efficiency in collecting debt. There is no specific standard value, but to many days may influence your cash flow.

4. Accounts payable days: Accounts payable x 365 / Yearly cost of sales

The ratio shows the average number of days it takes you to pay your suppliers. An increasing value indicates that you are taking longer to pay your suppliers, and a decreasing value indicates you are paying quicker. There is no specific standard value, but the longer your creditors allow for payment the better for your cash flow.

5. Inventory days: Inventory x 365 / Yearly cost of sales

This ratio shows on average how many days an item is held in inventory prior to being sold. An increasing value could indicate inefficient purchasing and / or too high inventory holding, whereas a decreasing number could indicate more efficient purchasing.

6. Gross profit margin: Turnover - Cost of sales = Gross profit Gross profit / Turnover

To determine the percentage of the turnover that will be left to pay expenses. Provides an indication of the markup on goods / inventory.

7. Asset turnover ratio: Yearly sales / Total assets

To determine how efficient a company utilises its assets to generate sales. The higher the better.

8. Staff productivity ratio: Turnover / Staff costs

To ensure staff employed in your business are productive and effective.

9. Breakeven point: Operating costs / Gross profit margin

To ensure the lowest turnover needs to be achieved to cover its expenses and cost of sales.

Dryk Financial Services Book Store