Business Advice Development Your Business Team Dunedin New Zealand

Profit and Loss Items

Sales :

Cost of Goods Sold :

Gross Profit Margin :

The Gross profit of a business is the profit earned before any administrative, selling and other expenses are taken into account. The gross margin represents the gross profit earned by the business per dollar of sales

Operating Expenses :
(excl owners remuneration)

Net Profit :

The Net Profit of a business is the profit earned after taking into account administrative, selling and other expenses. Taxation and dividends are excluded from this calculation. The net profit margin represents the net profit earned per dollar of sales.

Breakeven Analysis :

Breakeven analysis outlines the level of sales necessary to operate a business on a breakeven basis. At breakeven, total costs equal total revenue, i.e. you don't make any money, but you don't lose any money either.

Balance Sheet Items

Stock :			Payables :
Receivables :			Total Current Liabilities :
Total Current Assets :

Current Ratio :			Stock Turnover :
Quick Ratio :			Debtors Days :
			Creditors Days :

Results

Current Ratio

The current ratio, also known as the working capital ratio, measures the ability of a business to satisfy its short term liabilities. A general rule of thumb is to have a current ratio of 2.0. Below this, there may be issues regarding ability to pay debts, while above it there may be an inefficient use of capital

Quick Ratio

The quick ratio is similar to the current ratio except that it removes stock from current assets. This is a reflection of the sometimes slower selling time of stock even in an emergency. While industries vary widely, a ratio of between 0.50 and 1.00 is considered the norm. A ratio below 0.50 may indicate a risk of running out of working capital. A ratio above 1.00 indicates low reliance on stock.

Stock Turnover

This ratio measures the number of times the stock turned over during the year. Generally, the higher this ratio, the better the use of stock. Low stock turnover ratios may indicate an unnecessary amount of capital tied up in stock. It varies from industry to industry and is dependent on stock life. For example, supermarkets average 33 whilst jewellers only average 2. You should measure your ratio against the norm for your industry.

Debtors Days

This ratio measures the number of days on average it takes to collect debtors. Generally the quicker you collect debtors the better your cash flow will be. Most businesses should strive for collection around 35 days - cash businesses will show a substantially lower ratio.

Creditors Days

This ratio measures the number of days on average it takes to pay creditors. This ratio will reflect the businesses performance in meeting its creditor commitments. Most businesses' payment history will be around 45 days. A very low ratio either reflects a cash business or poor credit terms in place. A very high ratio suggests heavy reliance on creditors or aggressive stance by business using its creditors. The latter usually reflects maximum bank support.

Summary

For a better understanding of these ratios and any others that may be relevant to your business please contact YBT to discuss in more details.

"What you can measure you can manage"

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