Preparing an annual business report card on key financial ratios helps you see at-a-glance how your performance has changed year-on-year.
It gives you a handy summary of how your business performs in areas such as profitability, leverage, stock turnover and debt recovery.
The Business Development Corporations lists key indicators on its website. Check the Australian Bureau of Statistics to compare industry standards for indicators such as profit margin.
Year-on-year report cards can also help staff see where they can add value and help set goals for the upcoming year.
Profitability
Formula: (net profit x 100) ÷ sales revenue
Tells you: How much of each dollar in sales is net profit. Obviously, the higher the better, but look for industry standards.
Accounts receivable turnover
Formula: (accounts receivable ÷ credit sales) x 365
Tells you: How many days, on average, before accounts are settled (commonly called DSO - Days Sales Outstanding). Small shifts in how quickly you can get customers to pay their accounts can have a big impact.
Liquidity ratio
Formula: current liabilities ÷ current assets
Tells you: If you have enough assets to cover your debts with a buffer for unexpected downturns. The rule of thumb is your result should be two or higher.
Stock turnover
Formula: cost of goods sold ÷ {0.5 x (opening stock + closing stock)}
Tells you: How many times each year your stock turns over, which tells you how long it takes you to turn stock into cashflow. The higher the stock turnover the better.
