You can’t manage what you can’t measure.
That is why entrepreneurs need to analyse their businesses’ financial and operational performance periodically.
Business owners, who are already wearing so many hats, may find it challenging to accomplish this task. Here’s where financial ratios help.
Financial ratios are a vital tool for business owners to measure their progress toward reaching company goals. When performed regularly, ratio analysis can help in recognising and adapting to trends affecting their operations. They are measures of a company’s success from bankers’ and investors’ perspectives.
Key ratios include:
Expense to Revenue Ratio – A measure of how efficiently the business is conducting its operations.
How to calculate:
Expense-to-Revenue Ratio = (Cost of Sales + Expenses) / Revenue * 100
Operating Profit Margin – A measure of the proportion of revenue that is left after deducting all operating expenses. This reveals the operating efficiency of the business.
How to calculate:
Operating Profit Margin = Operating Profit / Revenue * 100
Profitability Ratio – A measure of the proportion of revenue that is left after deducting all expenses. This excludes finance costs and tax expenses.
How to calculate:
Profitability Ratio = Earnings Before Interest & Tax / Revenue * 100
Gross Profit Margin – A measure of the proportion of revenue that is left after deducting all costs directly related to the sales.
How to calculate:
Gross Profit Margin = Gross Profit / Revenue * 100
Want to know your numbers and gain better control of your business?
Get in touch with us, and we’ll help you have a better understanding of these ratios.