We’ve had some great feedback on our Cash Budget and Income and Expenditure template.  More of you are mastering Financial Statements and Cash Flow management, but we have more to share. Have a go at these Ratios. They’re handy to be familiar with, as the Banks often use them in deciding whether to give you money! They help you too in making critical decisions about your Capital Spending and Debt Management.

The Efficiency Ratio:

This is often called the Operating Ratio. Total expenses over a given period and divide that number by income over the same period. This tells you how how efficient you are at turning your expenses into Revenue. Track this one over time and compare it to the same period in prior months or years to see how you are improving.

Debt to Income Ratio:

This one is often used by Banks in deciding whether to approve credit. Divide the total you are paying on loans per month/year by total income for the same period. If a large percentage of your income is being used to pay down loans, it may prevent you obtaining short term credit. It may be worth exploring long term debt restructuring options.

The Current Ratio:

This is often called the Liquidity Ratio. It’s an indicator of how easily a Company can pay it’s debts if it became necessary to sell off assets to cover them. From your Balance Sheet, take the Current Assets figure and divide it by the Current Liabilities, this gives you your Current Ratio.

Note:

  • Increase in assets has negative cash flow effect.
  • Decrease in liability or capital has a negative cash flow effect
  • Decrease in assets has a positive cash flow effect
  • Increase in liability or capital has a positive cash flow effect
Consider selling off any equipment you rarely use, or returning surplus stock you are not likely to shift in the near future.

Debtors Days:

Is total debtors for a period divided by total Sales for the same period multiplied by 365. This gives you the average number of days it’s taking you to get paid. Compare it to the credit terms you normally offer your Customers. If your Debtors Days are more than double your usual credit terms, your cash health is heading for trouble. Read our post on Getting Paid Faster here:  

Creditors Days:

Total Creditors divided by total Sales for a period, multiplied by 365. This gives you an idea of your Credit Worthiness in the eyes of your suppliers. If this is very high, say, above 60 days, you may have trouble getting credit in the future.
We hope this blog helps you get more from your Financial statements. Experiment with finding your own ratios and percentages. Let us know if you find any you’d like to share: hello@bullethq.com

 

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