Home – New Forums Money matters How to Interpret Your Financials and Benchmarks

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  • #968389
    sleepyoz
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    I spent an enjoyable day with a dynamic client today and we got to talking about the importance of being able to interpret financial statements and benchamrk results against industry standards to provide some strategies for business growth – this got me thinking about how many other people could benefit from this sort of discussion and where better to promote it than in the Flying Solo forum – so here is a list of some of the things I spoke about with the client today

    Financial Ratios

    Financial ratios assist to measure where your business currently stands, where it’s been and where it’s heading. They also help you measure yourself against industry benchmarks, and see how you’re tracking against your business plans – there are a number of ratios you can use but some of the common ones are

    Gross Profit Margin – gross profit/sales – assesses the profitability of products/services prior to operating expenses – if you sell more than one product/service you should have them listed out in your records so you can assess them more easily – there could be products/services that are bringing your margins down and likewise it could show that you need to concentrate on the more profitable deliverables in your businesses

    Operating Expense Ratio – total expenses/total sales – for every dollar of revenue you earn what is spent on operating expenses

    Net Profit Margin – net income/sales – this shows you in percentage terms the profit your business makes for every $ of income after covering all your operating expenses

    Current ratio – current assets/current liabilities – this helps to measure the solvency of your business by assessing whether your current assets (unpaid bills, cash at bank etc) is enough to meet your current liabilities (unpaid bills, tax laibilites, short term loans etc) as a rule of thumb many banks like this ratio to be 2 or more(in other words your assets are double that of your liabilities) which means you have ample capacity to meet your liabilites

    Inventory turnover – cost of goods sold/inventory – if you sell products then this is a good measure is shows how many times your trading stock is “turned over” (sold and restocked)during a specific period so for example if you spend $100 000 on stock and keep say $10 000 worth of stock on hand then you are turning your inventory over 10 times a year – low figures may means you have money tied up in stock that is not moving and could affect cashflow and higher figures may mean you are not keeping enough trading stock on hand

    Return on Owners Equity – net income/owners equity – this measures how much your making on the investment you have put into your business – so say you invested $100 000 worth of capital into the business and the business generated net income of $50 000 then your return on owners equity is 50% – this is a great way of comparing whether the investment you have made in your business is comparable to what you may have earned if you had put your money into another investment

    There are many other ratios you can use to measure performance and efficiency over time such as

    • Other Financial Ratios
      Accounts payable turnover
      Accounts Payable period
      Accounts receivable turnover
      Total debt ratio


    Remember you cannot manage what you cannot measure

    Benchmarks
    Being able to benchmark your business against industry standards can give you some valuable insight into your business. You can use these benchmarks to help formulate plans for a new business or to employ strategies for a business growth, set targets, improve business performance. The link below provides a number of products such as industry profiles (around $220 per profile) and small business analysis

    http://www.benchmarking.com.au/

    I hope this information will assist you in measuring the performance of your business

    Good Luck

    Cheers

    Leanne

    #1032914
    Anonymous
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    Hi Leanne,

    Thanks for this very handy reminder. It ties in nicely with another thread we have running at the moment actually, about new financial year resolutions: http://www.flyingsolo.com.au/forums/working-smarter/7090-tax-time-new-financial-year-resolutions.html

    Lots to think about!
    Thanks again,
    Jayne

    #1032915
    Rhys
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    Great post Leanne, lots of good information in there. Three points I’d like to add to this:

    1. As well as the really important profit and loss ratios you discuss, business owners should be tracking their cashflow – and this doesn’t just mean bank balance. Leanne gives one of the ways of looking at cash flow position at a point in time via the current ratio, but I would add to that tracking it over time. Business owners should track their cashflow month by month (at the very least) so they not only know where they are now but can forecast where they will be in the future (and if that is not where they want to be react to that at the earliest possible moment).

    2. What to measure against? i.e. how do you judge if the result of the ratio you are measuring is “good” or “bad”? Leanne focuses on benchmarking, but you can also compare to your actual figures to prior year, or to budget. Each option has its place. I recently wrote a blog post on this topic (available on my website, link in my signature).

    3. The benchmarking site you refer to is a great resource (there are others around also), but for those just about to dip their toe in the water for the first time there is also a free option for obtaining benchamrking data. The ATO have recently made available summary data for around 50 industries, that you can use to compare how you are performing compared to other similar businesses. You can check out the ATO data here.

    The most critical point in all this is not so much how you measure but that you measure at all, because if you are not measuring your business you are not able to control it. Whilst there is no one right answer when it comes to management reporting, doing nothing is not one of them!

    cheers, Rhys

    #1032916
    Scott R
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    Some very good points in this thread. I agree that ratio analysis is one the tools that can improve the management of our business that is sometimes overlooked.

    The Queensland government provides some useful tips at: http://skills.business.qld.gov.au/planning/694.htm

    Cheers
    Scott

    #1032917
    sleepyoz
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    Hi Rhys & Scott

    Thanks for joining the conversation and adding even more value!

    Ive been working with FMRC for over 20years now and find their industry profiles easy for clients to understand and refer to – but yes there are a great many resources out there for small business to “benchmark” against

    Rhys – hope to see you Saturday :)

    #1032918
    Rhys
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    Leanne,

    Yes will see you Saturday. And if there are any other MYOB CCs reading this who haven’t registered for the CC meeting in Parramatta this Saturday please send me a PM. Great agenda, great speakers, and of course great company!!

    Cheers, Rhys

    #1032919
    StellarScott
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    This is a great example of where a good book keeper /accountant can add great value to any business

    This should be on Flying solos home page !

    #1032920
    @HeatherSmithAU
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    Leanne,

    You are sensational – great information.

    You can not manage what you can not measure!

    #1032921
    BronwynBuck
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    Thanks Leanne for starting this thread and to Rhys re mentioning cash flow.
    My observation re cash flow is that some business owners have their finger on the pulse and update weekly. Others owners are like ostriches and put their head in the sand.
    Cash flow is the life blood of a business. It is easy to make a sale, but unless the cash as a result of the sale is in the bank in the timeframe expected, then it is not time to celebrate.
    If cash flow is managed well plus the ratios mentioned are monitored then a business owner has the best information to make decisions.
    Numbers are good, look at them and then take action

    #1032922
    DS_BVS
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    HI

    Good article on ratio analysis. It’s a good tool for diagnostic purposes and when looked at holistically you can get a feel for how a business is performing and trending.

    With the cash flow forecasts I always try to keep the time frame short between reviews because forecasts usually change quite a bit. If you develop a good sales mix worksheet prior to the actual cash flow, it is easy to adjust for volumes or rates that can then flow into your cash flow forecast with a minimum of data entry. The use of actual and budget comparisons is also preferable. You can test a lot of “what if” scenarios this way also.

    Just something you might like to add is to look at “Z” Scores as a predictor of potential financial failure. This can give you an early warning system that sometimes isn’t available with straight ratios. You normally need about three years of financial data however.

    cheers

    #1032923
    Scott R
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    Hi,

    I have an article on ‘how to benchmark your business using the ato benchmarks’ on my website. I have included a spreadsheet to make it easier for people.

    Here is the link http://www.beyondthenumbers.com.au/benchmark.html

    Regards
    Scott

    #1032924
    Anonymous
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    Hi Scott,

    Thanks – that’s mighty helpful, and you’ve made it very easy to follow.

    Love your work!
    Jayne

    #1032925
    Scott R
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    FS Concierge, post: 48465 wrote:
    Hi Scott,

    Thanks – that’s mighty helpful, and you’ve made it very easy to follow.

    Love your work!
    Jayne

    Hi Jayne,

    Thanks for the comments. I was trying to to make as easy as possible.

    Regards
    Scott

    #1032926
    Scott R
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    Scott R, post: 48448 wrote:
    Hi,

    I have an article on ‘how to benchmark your business using the ato benchmarks’ on my website. I have included a spreadsheet to make it easier for people.

    Here is the link http://www.beyondthenumbers.com.au/benchmark.html

    I have just uploaded a video on how to use the ATO benchmarks.

    Cheers
    Scott

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