Are you making your numbers work?
Do you measure, analyse, consider and improve those real numbers that impact on your performance?
Have you considered what numbers you could be measuring in your business?
Yes, here at Chapman Robinson & Moore, we love our numbers, but we are passionate about helping our clients make their numbers work for their continual and future success.
To help your own thoughts, firstly, here are some examples of the more common performance indicators measured by other businesses:
- Current Ratio Generally, this metric measures the overall liquidity position of a business. It is certainly not a perfect barometer, but it is a good one. Watch for big decreases in this number over time. Make sure the accounts listed in “current assets” are collectible. The higher the ratio, the more liquid the company is.
- Quick Ratio This is another good indicator of liquidity, although by itself, it is not a perfect one. If there are debtor accounts included in the numerator, they should be collectible. Look at the length of time the company has to pay the amount listed in the denominator (current liabilities). The higher the number, the stronger the company.
- Net Profit Margin This is an important metric. In fact, over time, it is one of the more important barometers that we look at. It measures what percentage of profit the company is generating for every pound of turnover it earns. Track it carefully against industry competitors. This is a very important number in preparing forecasts. The higher the better.
- Gross Profit Margin This number indicates the percentage of turnover that is not paid out in direct costs (costs of sales). It is an important statistic that can be used in business planning because it indicates what percentage of gross profit can be generated by future turnover. Higher is normally better (the company is more efficient). Gross margins are a leverage tool, which means that small improvements here can drive large net profit improvements.
- Trade Debtor Days This number reflects the average length of time between credit sales and payment receipts. It is crucial to maintaining positive liquidity. The lower the better.
- Trade Creditor Days This ratio shows the average number of days that lapse between the purchase of material and labour, and payment for them. It is a rough measure of how timely a business is in meeting payment obligations.
- Interest Coverage Ratio This ratio measures a company’s ability to service debt payments from operating cash flow (EBITDA). An increasing ratio is a good indicator of improving credit quality. The higher the better.
- Debt-to-Equity Ratio This Balance Sheet leverage ratio indicates the composition of a company’s total capitalisation – the balance between money or assets owed versus the money or assets owned. Generally, creditors prefer a lower ratio to decrease financial risk while investors prefer a higher ratio to realise the return benefits of financial leverage.
- Return on Equity This measure shows how much profit is being returned on the shareholders’ equity each year. It is a vital statistic from the perspective of equity holders in a company. The higher the better.
- Return on Assets This calculation measures the business’s ability to use its assets to create profits. Basically, ROA indicates what percentage of profit each pound of assets is producing per year. It is quite important since managers can only be evaluated by looking at how they use the assets available to them. The higher the better.
- Gearing Ratio This is Net Borrowings divided by Shareholders funds. It is an expression of the amount of external borrowing versus the amount invested by shareholders. Net borrowings are bank loans and overdrafts minus cash in hand and other deposit balances. A lower ratio is generally better as it shows a the company mainly financed by equity. Higher gearing rates show an overdependence on debt for a large portion of the company’s capital needs
- Fixed Asset Turnover This asset management ratio shows the multiple of annualised turnover that each pound of tangible assets is producing. This indicator measures how well tangible assets are “throwing off” turnover and is very important to businesses that require significant investments in such assets. Readers should not emphasise this metric when looking at businesses that do not possess or require significant tangible assets. The higher the ratio, the more effective the company’s investments in Net Property, Plant, and Equipment are.
- Advertising to Turnover This metric shows advertising expense for the company as a percentage of turnover.
- Wages & Salaries to Turnover This metric shows wages and salaries for the company as a percentage of turnover.
- Rent to Turnover This metric shows rent for the company as a percentage of turnover.
However, you may not get the benefit you desire by simply measuring these numbers. They may not be the ones for you or your business.
In our view, financial analysis is not a science; it is about interpretation and evaluation of financial events. The starting point is to know what you want to measure or need to measure. This is usually based around what you want to achieve and an understanding of those factors that truly impact on the performance of your business. They may not be standard financial ratios, but numbers that impact on the positive activity you need to continually improve your performance.
If you would like to talk about how you could better analyse your business performance and understand your real numbers, then please call us on 01865 379272.