The best way to analyse accounting information and comparing it over different time periods or with different businesses is to use an array of accounting ratios. These are used as a way of highlighting the relationship that exists between figures in a set of accounts as an aid to evaluating business performance and predicting future trends.
There are seven key ratios for your business:-
Gross Profit Ratio is the most commonly used ratio where gross profit is measured as a percentage of sales.
Net Profit Ratio is similar to the gross profit ratio but looks at net profit as a percentage of turnover.
Current Ratio reflects the balance sheet relationship between current assets and current liabilities. It is a useful indicator of a business’s ability to meet its liabilities as they fall due.
Liquid Ratio or Acid Test is the same as the Current Ratio except only liquid assets ie cash and other assets capable of being quickly converted into cash are included as well as all the current liabilities.
Debtors Ratio indicates the average length of time customers are taking to pay the invoices.
Creditors Ratio indicates the average length time the business is taking its suppliers. It tends to be more useful when you are looking at taking on a customer as it will give an idea on their speed of payment.
Gearing Ratio indicates the proportion of long term liabilities to the total capital of the business.
Return on Capital Employed measures the net profit as a percentage of the net worth of the business. The net profits are shown on a balance sheet and are calculated as total assets less liabilities. This represents the amount of capital that has been invested in the business.
If you would like more information on the application of forecasting and on using financial ratios to analyse your business please contact Drummond to arrange for more in depth information.