Financial ratios are often only looked at once a year, when compliance is complete, however regularly checking the financial health of your business can assist in identifying areas where the business could improve it’s bottom line.
Here are 5 Ratios that any business owner should have an understanding of, and be able to compare/track against the industry average.
1. Gross Profit Margin – This is the percentage of sales dollars remaining to pay general expenses following the deduction of the cost of goods sold. For trading businesses especially, it’s imperative to maximise this margin to cover the remaining costs of the business.
2. Net Profit Margin – This is the percentage of revenue left after all expenses have been deducted from sales. For example, the net profit margin of 15% would mean that for every $100 of sales, $15 would be profit. We see many clients not knowing what their net profit percentage is and how it compares to the industry average.
3. Mark–up Margin – This percentage is the difference between the actual cost and the selling price. Tweaking your mark-up margin to it’s fullest potential can improve the bottom line of your business. In many scenarios we see clients not passing increasing costs to their clients which results in them burdening the costs and reducing their bottom line.
4. Inventory Turnover – This ratio indicates the number of times the stock in the business has turned over. It’s key to have an idea of your stock turnover to ensure storage costs are kept down and to free up extra cash by not holding onto too much stock in the business.
5. Break Even Analysis – This analysis shows how many sales have to be made in dollars before all the expenses are covered and actual profit begins. As a business owner it’s imperative that you know what your weekly sales target should be just to break even. Do you know what your break even point is?
Initiative Group can assist you with calculating these ratios, explain how they affect you and your business and potentially improve your bottom line.