Ratios

• Current Ratio:

  Shows Liquidity and if financially stable in the short term (12 months) by working out if it can afford to pay all its short-term liabilities using its current assets. Also how well the biz is able to convert CA into cash.
• How TO Calculate Current(Liquidity) Ratio:

  Current Assets:Current Liabilities
• Strategies to Improve Liquidity:

  • Sell CA to pay for CL
  • On time payments for CL
  • Factoring (Improves Cash/CA) - get payment now (IMPROVES CASH FLOW)
  • Leasing
  • Lease and Sale Back
  • JIT (minimum inventory)
• Gearing Ratio: Represents Solvency of Business; if a business can pay all of its liabilities. Measurement of financial stability. GIves indication to shareholders about risk of investing
• How to Calculate Gearing:

  Total Liabilities/Total Equity

  (Higher = less solvent=worse)
• Strategies to Improve Gearing:

  • Increase Equity (more shareholders)
  • Increased Retained Profits
  • Decrease Debt (Early Payments)
• Gross Profit Ratio: shows percentage of sales is gross profit.
• How to Calculate Gross Profit Ratio:

  Gross Profit/Sales x 100
• Strategies to Improve Gross Profit:

  • Increase Markup(Revenue)
  • Supplier rationalisation to reduce inventory costs
  • Increase sales levels( through marketing)
  • Decrease Quality of Inventory (Inventory Costs)
• Net Profit Ratio: Shows percentage of sales is net profit
• How to Calculate Net Profit:

  Net Profit/Sales x 100
• Strategies to Improve Net Profit Ratio

  • Expense Minimisation (Evaluate from IS)
  • Cheaper Supplies/Expenses
  • Increase Markup
• Return On Owner’s Equity Ratio: Indicates how much return from investment in business.. How effective funds contributed have been generating profit and ROI
• How to Calculate Return on Owners Equity Ratio:

  Net Profit/Equity x 100
• Startegies to Improve Return on Owners Investment:

  • Increase Net Profit
• Expense Ratio: Shows efficiency, or percentage of sales is going to expenses
• How to Calculate Expense Ratio:

  total expenses/sales x 100
• Strategies to improve expense ratio:

  • Expense Minimisation eg. Cheaper supplies(COGS), Bulk Buy, Discounts, Inventory Management (JIT), New capital(more efficient)
  • Increase Sales (Marketing)
• Accounts Receivable Ratio: How many days on average it takes for account customers to pay invoices
• How to Calculate Accounts Receivable Ratio:

  Sales/Accounts Receivables --> 365/result
• Strategies to Improve Accounts Receivable Ratio

  Control of Current Assets:

  • Discount for Early Payment
  • Factoring
• Comparative Ratio Analysis: How to compare results and ratios

  before and after data

  Time Comparison: before and after data

  Industry Average

  Benchmark against similar Biz