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Financial Ratios

Quick Ratio: Liquidity. Ratio between liquid assets and current liabilities. If less than 1:1 you can delay payment and /or convert more assets into cash. But... this is the first sign of trouble. You don't have enough working capital, or yours bills are too high or your paying your bills too quickly or not collecting recievables fast enough.

Collection period ratio: Ratio of net sales to account receivable divided into the number of days in a year (365 or 360 for simplicity) less the number of days terms you get from your suppliers. E.g. With $200,000 net sales and $20,000 recievable the first ratio is 10. Divide that into 360 for a result of 36. If you get 30 day terms from suppliers the final result is 6. 10 or less is good. Higher numbers indicate a need to collect faster, negotiate longer terms or both.

Stock to Sales ratio: Ratio of annual net sales to average monthly inventory. Tells you how many times your inventory turns over in a year. The higher the number the better. 12 or better is good.

Profit Margin: Divide your net income by you net sales. Varies widly depending on the type of business.

Operating expense and a percentage of net sales:

Return on investment. Owers equity divided by set (after - tax) profit.

See also:


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