Business Ratios and Formulas E-Book

Steven M. Bragg

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 572

Veröffentlichungsjahr: 2011

Beschreibung

Required reading for anyone starting, running, or growing a business, Business Ratios and Formulas, Second Edition puts answers at the fingertips of business managers, with nearly 250 operational criteria and clear, easy-to-understand explanations that can be used right away. The Second Edition includes approximately fifty new ratios and formulas, as well as new chapters covering ratios and formulas for e-commerce and human resources.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

About the Author

Preface

Acknowledgments

Chapter 1 - Introduction

Chapter 2 - Asset Utilization Measurements

SALES TO WORKING CAPITAL RATIO

SALES TO FIXED ASSETS RATIO

SALES TO ADMINISTRATIVE EXPENSES RATIO

SALES TO EQUITY RATIO

SALES PER PERSON

SALES BACKLOG RATIO

SALES RETURNS TO GROSS SALES RATIO

REPAIRS AND MAINTENANCE EXPENSE TO FIXED ASSETS RATIO

ACCUMULATED DEPRECIATION TO FIXED ASSETS RATIO

FRINGE BENEFITS TO WAGES AND SALARIES EXPENSE

SALES EXPENSES TO SALES RATIO

DISCRETIONARY COST RATIO

INTEREST EXPENSE TO DEBT RATIO

FOREIGN EXCHANGE RATIOS

OVERHEAD RATE

GOODWILL TO ASSETS RATIO

OVERHEAD TO COST OF SALES RATIO

INVESTMENT TURNOVER

BREAK-EVEN POINT

MARGIN OF SAFETY

TAX RATE PERCENTAGE

Chapter 3 - Operating Performance Measurements

OPERATING ASSETS RATIO

SALES TO OPERATING INCOME RATIO

SALES MARGIN

GROSS PROFIT PERCENTAGE

GROSS PROFIT INDEX

INVESTMENT INCOME PERCENTAGE

OPERATING PROFIT PERCENTAGE

OPERATING LEVERAGE RATIO

NET INCOME PERCENTAGE

CORE OPERATING EARNINGS

PROFIT PER CUSTOMER VISIT

PROFIT PER PERSON

CORE GROWTH RATE

QUALITY OF EARNINGS RATIO

Chapter 4 - Cash Flow Measurements

CASH FLOW FROM OPERATIONS

CASH FLOW RETURN ON SALES

FIXED CHARGE COVERAGE

EXPENSE COVERAGE DAYS

CASH FLOW COVERAGE RATIO

CASH RECEIPTS TO BILLED SALES AND PROGRESS PAYMENTS

CASH TO CURRENT ASSETS RATIO

CASH FLOW TO FIXED ASSET REQUIREMENTS

CASH FLOW RETURN ON ASSETS

CASH TO WORKING CAPITAL RATIO

CASH REINVESTMENT RATIO

CASH TO CURRENT LIABILITIES RATIO

CASH FLOW TO DEBT RATIO

STOCK PRICE TO CASH FLOW RATIO

DIVIDEND PAYOUT RATIO

Chapter 5 - Liquidity Measurements

ACCOUNTS RECEIVABLE TURNOVER

AVERAGE RECEIVABLE COLLECTION PERIOD

DAYS DELINQUENT SALES OUTSTANDING

DAYS SALES IN RECEIVABLES INDEX

ACCOUNTS RECEIVABLE INVESTMENT

ENDING RECEIVABLE BALANCE

INVENTORY TO SALES RATIO

INVENTORY TURNOVER

INVENTORY TO WORKING CAPITAL RATIO

LIQUIDITY INDEX

ACCOUNTS PAYABLE DAYS

ACCOUNTS PAYABLE TURNOVER

CURRENT RATIO

QUICK RATIO

CASH RATIO

SALES TO CURRENT ASSETS RATIO

WORKING CAPITAL PRODUCTIVITY

DAYS OF WORKING CAPITAL

DEFENSIVE INTERVAL RATIO

CURRENT LIABILITY RATIO

REQUIRED CURRENT LIABILITIES TO TOTAL CURRENT LIABILITIES RATIO

WORKING CAPITAL TO DEBT RATIO

RISKY ASSET CONVERSION RATIO

NONCURRENT ASSETS TO NONCURRENT LIABILITIES RATIO

SHORT-TERM DEBT TO LONG-TERM DEBT RATIO

ALTMAN’S Z-SCORE BANKRUPTCY PREDICTION FORMULA

Chapter 6 - Capital Structure and Solvency Measurements

TIMES INTEREST EARNED

DEBT COVERAGE RATIO

ASSET QUALITY INDEX

ACCRUALS TO ASSETS RATIO

TIMES PREFERRED DIVIDEND EARNED

DEBT TO EQUITY RATIO

FUNDED CAPITAL RATIO

RETAINED EARNINGS TO STOCKHOLDERS’ EQUITY

PREFERRED STOCK TO TOTAL STOCKHOLDERS’ EQUITY

ISSUED SHARES TO AUTHORIZED SHARES

Chapter 7 - Return on Investment Measurements

NET WORTH

BOOK VALUE PER SHARE

TANGIBLE BOOK VALUE

RETURN ON ASSETS EMPLOYED

RETURN ON INFRASTRUCTURE EMPLOYED

RETURN ON OPERATING ASSETS

RETURN ON EQUITY PERCENTAGE

RETURN ON COMMON EQUITY

FINANCIAL LEVERAGE INDEX

EQUITY GROWTH RATE

EARNINGS PER SHARE

PERCENTAGE CHANGE IN EARNINGS PER SHARE

ECONOMIC VALUE ADDED

RELATIVE VALUE OF GROWTH

DIVIDEND PAYOUT RATIO

DIVIDEND YIELD RATIO

Chapter 8 - Market Performance Measurements

INSIDER STOCK BUY-SELL RATIO

MARKET VALUE ADDED

ENTERPRISE VALUE/EARNINGS RATIO

STOCK OPTIONS TO COMMON SHARES RATIO

COST OF CAPITAL

SALES TO STOCK PRICE RATIO

PRICE/EARNINGS RATIO

CAPITALIZATION RATE

Chapter 9 - Measurements for the Accounting/Finance Department

PURCHASE DISCOUNTS TAKEN TO TOTAL DISCOUNTS

PERCENTAGE OF PAYMENT DISCOUNTS MISSED

TRANSACTIONS PROCESSED PER PERSON

TRANSACTION ERROR RATE

AVERAGE TIME TO ISSUE INVOICES

AVERAGE EMPLOYEE EXPENSE REPORT TURNAROUND TIME

PAYROLL TRANSACTION FEES PER EMPLOYEE

TIME TO PRODUCE FINANCIAL STATEMENTS

PERCENTAGE OF TAX FILING DATES MISSED

PROPORTION OF PRODUCTS COSTED PRIOR TO RELEASE

INTERNAL AUDIT SAVINGS TO COST PERCENTAGE

INTERNAL AUDIT EFFICIENCY

BAD DEBT PERCENTAGE

PERCENT OF RECEIVABLES OVER XX DAYS OLD

PERCENTAGE COLLECTED OF DOLLAR VOLUME ASSIGNED

COLLECTION EFFECTIVENESS INDEX

PERCENT OF CASH APPLIED ON DAY OF RECEIPT

UNMATCHED RECEIPTS EXPOSURE

COST OF CREDIT

EARNINGS RATE ON INVESTED FUNDS

BROKERAGE FEE PERCENTAGE

BORROWING BASE USAGE PERCENTAGE

Chapter 10 - Measurements for the Engineering Department

BILL OF MATERIAL ACCURACY

LABOR ROUTING ACCURACY

PERCENTAGE OF NEW PRODUCTS INTRODUCED

PERCENTAGE OF SALES FROM NEW PRODUCTS

PERCENTAGE OF NEW PARTS USED IN NEW PRODUCTS

PERCENTAGE OF EXISTING PARTS REUSED IN NEW PRODUCTS

AVERAGE NUMBER OF DISTINCT PRODUCTS PER DESIGN PLATFORM

PERCENTAGE OF PRODUCTS REACHING MARKET BEFORE COMPETITION

INTANGIBILITY INDEX

SCIENCE LINKAGE INDEX

RATIO OF ACTUAL TO TARGET COST

WARRANTY CLAIMS PERCENTAGE

TIME FROM DESIGN INCEPTION TO PRODUCTION

PERCENTAGE OF FLOOR SPACE UTILIZATION

Chapter 11 - Measurements for the Human Resources Department

EMPLOYEE TURNOVER

AVERAGE TIME TO HIRE

LATE PERSONNEL REQUISITIONS RATIO

INTERN HIRING PERCENTAGE

RATIO OF SUPPORT STAFF TO TOTAL STAFF

Chapter 12 - Measurements for the Logistics Department

PRODUCTION SCHEDULE ACCURACY

ECONOMIC ORDER QUANTITY

NUMBER OF ORDERS TO PLACE IN A PERIOD

ECONOMIC PRODUCTION RUN SIZE

RAW MATERIAL INVENTORY TURNS

RAW MATERIAL CONTENT

FINISHED GOODS INVENTORY TURNS

OBSOLETE INVENTORY PERCENTAGE

PERCENTAGE OF INVENTORY > XX DAYS OLD

PERCENTAGE OF RETURNABLE INVENTORY

INVENTORY ACCURACY

PERCENTAGE OF CERTIFIED SUPPLIERS

ELECTRONIC DATA INTERCHANGE SUPPLIER PERCENTAGE

DISTRIBUTION TURNOVER

ON-TIME PARTS DELIVERY PERCENTAGE

PURCHASED COMPONENT DEFECT RATE

INCOMING COMPONENTS CORRECT QUANTITY PERCENTAGE

PERCENTAGE OF ACTUAL PAYMENTS VARYING FROM PURCHASE ORDER PRICE

PERCENTAGE OF PURCHASE ORDERS ISSUED BELOW MINIMUM DOLLAR LEVEL

PROPORTION OF CORPORATE CREDIT CARD USAGE

PERCENTAGE OF RECEIPTS AUTHORIZED BY PURCHASE ORDERS

FREIGHT AUDIT RECOVERY RATIO

PICKING ACCURACY FOR ASSEMBLED PRODUCTS

ORDER FILL RATE

AVERAGE TIME TO SHIP

ON-TIME DELIVERY PERCENTAGE

PERCENTAGE OF PRODUCTS DAMAGED IN TRANSIT

PERCENTAGE OF SALES THROUGH DISTRIBUTORS

Chapter 13 - Measurements for the Production Department

CONSTRAINT PRODUCTIVITY

TAKT TIME

CONSTRAINT REWORK PERCENTAGE

CONSTRAINT SCHEDULE ATTAINMENT

CONSTRAINT UTILIZATION

DEGREE OF UNBALANCE

THROUGHPUT EFFECTIVENESS

MANUFACTURING CRITICAL PATH TIME

MANUFACTURING EFFICIENCY

BREAK-EVEN PLANT CAPACITY

MANUFACTURING EFFECTIVENESS

PRODUCTIVITY INDEX

UNIT OUTPUT PER DIRECT LABOR HOUR

AVERAGE EQUIPMENT SETUP TIME

UNSCHEDULED MACHINE DOWNTIME PERCENTAGE

MEAN TIME BETWEEN FAILURES

ACCEPTABLE PRODUCT COMPLETION PERCENTAGE

WORK-IN-PROCESS TURNOVER

SCRAP PERCENTAGE

WARRANTY CLAIMS PERCENTAGE

MAINTENANCE EXPENSE TO FIXED ASSETS RATIO

INDIRECT EXPENSE INDEX

REORDER POINT

ON-TIME DELIVERY RATIO

Chapter 14 - Measurements for the Sales and Marketing Department

MARKET SHARE

CUSTOMER TURNOVER

NET PROMOTER SCORE

BROWSE TO BUY CONVERSION RATIO

RECENCY

DIRECT MAIL EFFECTIVENESS RATIO

INBOUND TELEMARKETING RETENTION RATIO

PROPORTION OF COMPLETED SALES TO HOME PAGE VIEWS

QUOTE TO CLOSE RATIO

PULL-THROUGH RATE

SALES PER SALESPERSON

SALES PRODUCTIVITY

SALES EFFECTIVENESS

SALES TREND PERCENTAGE BY PRODUCT LINE

PRODUCT DEMAND ELASTICITY

DAYS OF BACKLOG

Chapter 15 - Measurement Analysis with an Electronic Spreadsheet

FINANCIAL STATEMENT PROPORTIONAL ANALYSIS

FINANCIAL STATEMENT RATIO ANALYSIS

AUTOMATED RATIO RESULT ANALYSIS

LEVERAGE ANALYSIS

TREND ANALYSIS

FORECASTING

CASH FLOW ANALYSIS

CAPITAL ASSET ANALYSIS

COMPOUNDING ANALYSIS

INVESTMENT ANALYSIS

RISK ANALYSIS

APPENDIX - Measurement Summary

Glossary

Index

This book is printed on acid-free paper.

Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Bragg, Steven M.

Business ratios and formulas : a comprehensive guide / Steven M. Bragg.

p. cm.

Includes index

ISBN-13: 978-0-470-05517-5 (cloth) ISBN-10: 0-470-05517-0 (cloth)

1. Business mathematics. I. Title

HF5691.B73 2007

650.01’513—dc22

2006047277

To Andrea and Victoria: The value of watching you grow has been beyond measurement.

About the Author

Steven Bragg, CPA, CMA, CIA, CPIM, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young and auditor at Deloitte & Touche. He received a master’s degree in finance from Bentley College, an MBA from Babson College, and a bachelor’s degree in economics from the University of Maine. He has been the two-time president of the Colorado Mountain Club, is an avid alpine skier and mountain biker, and is a certified master diver. Mr. Bragg resides in Centennial, Colorado with his wife and two daughters. He has published the following books through John Wiley & Sons:

Accounting and Finance for Your Small BusinessAccounting Best PracticesAccounting Controls Best PracticesBilling and Collections Best PracticesController’s Guide to CostingController’s Guide to Planning and Controlling OperationsController’s Guide: Roles and Responsibilities for the New ControllerControllershipCost AccountingDesign and Maintenance of Accounting ManualsEssentials of PayrollFast CloseFinancial AnalysisGAAP GuideGAAP Implementation GuideInventory AccountingInventory Best PracticesJust-in-Time AccountingManaging Explosive Corporate GrowthOutsourcingPayroll AccountingPayroll Best PracticesSales and Operations for Your Small BusinessThe Controller’s FunctionThe New CFO Financial Leadership ManualThe Ultimate Accountants’ Reference

Also:

Advanced Accounting System (Institute of Internal Auditors) Run the Rockies (CMC Press)

Subscribe to Steve’s FREE accounting best practices newsletter, podcast, and blog at www.stevebragg.com. His podcast is also available through iTunes.

Preface

This book is designed for all corporate managers who need to understand the performance levels of their departments. It contains performance measurements for the accounting, engineering, logistics, production, and sales departments. These measurements cover not only financial matters, but also those related to efficiency, effectiveness, capacity, and market share. In addition, the book includes measurements related to asset utilization, operating performance, cash flows, liquidity, capital structure, return on investment, and market performance. These latter categories are of great interest not only to the accounting and finance departments, but also to a company’s creditors and investors.

There are nearly 200 measurements itemized in this book. Each one is accompanied by a complete description, an explanation of the calculation, an example, and cautions regarding its use. The cautions are of particular use, as they describe the elements of a measurement that can be modified to deliver misleading results, different measurements that may work better in certain situations, use on a trend-line basis, and other measurements that should be used to reinforce indicated results.

The book also describes how to use an electronic spreadsheet to compile a standard set of measurements, using Microsoft Excel as the template. This is especially useful for investors and financial personnel, who need to compile information about a company’s long-term performance.

Anyone who wishes to create a complete set of performance-tracking measurements for an entire company or for a specific function can use this book as a reference source. Managers can choose the correct blend of measurements to achieve an information set that can be used for feedback on strategy initiatives and specific efficiency projects, as well as for performance evaluations. This is the ideal tool for measuring corporate performance.

Centennial, Colorado October 2006

Acknowledgments

To Sheck Cho, the editor I have known longer than anyone else in the publishing business. Sheck, I value your experience and advice—you are the best.

1

Introduction

Every department in every business produces some kind of information that can be used by its manager to measure performance. This information may be related to operational considerations within the department, the financial condition of the entire company, or the performance of a company’s suppliers and customers. Unfortunately, managers may not be aware of the multitude of measurements that can be used to track these different levels of performance or of the ways that these measurements can yield incorrect or misleading information.

This book is designed to help managers select the best possible set of measurements for a given situation. Chapters 2 through 14 itemize a series of performance measurements for different aspects of a company. Chapter 2 contains asset utilization measurements that can be used to determine a company’s ability to sustain its sales, the level of asset and expense usage required to do so, and the sustainability of its current sales and expense levels. There are also specialized ratios that deal with such issues as sales returns, repairs and maintenance, fringe benefits, interest expense, and overhead rates.

Chapter 3 contains operating performance measurements, which describe an organization’s operating performance in such areas as sales, gross margins, investment income, operating profit, and net profit.

Chapter 4 contains cash flow measurements, which are useful in determining the ability of a company’s cash flows to keep it in business. These measurements should be used in conjunction with the liquidity measurements in Chapter 5, which focus on additional measurements related to cash flows, such as a company’s ability to collect accounts receivable in an efficient manner, use its inventory within a short time frame, pay its accounts payable when due, and generally maintain a sufficient amount of liquid funds to pay off short-term liabilities. Chapter 6 contains capital structure and solvency measurements, which determine the relationship between a company’s debt and equity, as well as the comparative proportions of different types of stock. It also addresses a company’s ability to remain solvent and so can be used in conjunction with Chapters 4 and 5.

Chapter 7 contains return on investment measurements, which encompass net worth, several types of return on assets and equity, earnings per share, economic value added, and return on dividends. Chapter 8 addresses a company’s financial market performance by describing such measurements as the price/earnings ratio, several variations on the stock options to common shares ratio, market value added, and the cost of capital.

Chapters 9 through 14 cover measurements for individual departments. These chapters are devoted to performance measurements for the accounting, engineering, human resources, logistics, production, and sales departments. In contrast to Chapters 2 through 8, which are devoted to measurements that are primarily used by the accounting and finance functions, Chapters 9 through 12 are more concerned with such issues as work capacity levels, efficiency, and effectiveness, which in many cases require no financial information at all. For example, measurements in Chapter 12, which deals with logistics, cover such topics as production schedule accuracy, the on-time parts delivery percentage, and picking accuracy for assembled products.

Chapter 15 covers a variety of topics related to measurements using the Microsoft Excel electronic spreadsheet, including how to set up comprehensive sets of measurements that can be used for proportional, leverage, ratio, and trend analyses. It also covers a variety of spreadsheet formulas and report formats for forecasting, cash flow analysis, capital asset purchase analysis, interest compounding, investment analysis, and risk analysis.

The book concludes with an appendix and glossary. The Appendix lists the names and formulations of every measure in the book, sorted by chapter. This list should only be used with the precautions given for them in their respective chapters to ensure their proper use. The Glossary covers the definitions of the terms found in many of the measurements listed in this book, to clarify the exact types of information needed.

The chapters containing measurements (Chapters 2 through 14) have an identical structure. Each begins with a table that lists the measurements described in it, which one can use to quickly access a needed calculation. Thereafter, each chapter is broken down into the discussion of individual measurements. Within each measurement section there are a description, formula, example, and discussion of cautionary items. The description typically notes how the measurement is used and who uses it. The formula shows any variations on the calculation and what types of data to include or exclude from it. The example is generally a complete scenario that describes how the measurement is used in a simulated business situation. Finally, any cautionary items are noted; these can include the ways in which the measurement can be altered to yield incorrect results, or what other measurement should be used with it in order to yield a more comprehensive set of information.

The reader may use this book to search for a single calculation, which can be used for highly targeted needs. However, a better approach is to peruse the entire book, with the objective of developing a complete set of measurements that will yield a more comprehensive view of a company’s entire operating and financial situation. For example, a CFO might be interested in a company’s stock market performance and therefore watches only the price/earnings ratio. However, this single measurement focuses only on the perception of investors with regard to a company’s future earnings potential. A more rounded set of measurements might include the days of sales backlog (since it indicates future changes in sales volume), production capacity utilization (since it shows the ability of the company to produce its incoming sales), and the days of accounts receivable (since it shows the company’s ability to convert sales into cash). The exact set of measurements will change in accordance with a company’s industry, size, operational configuration, and degree of financial leverage, but one issue will remain the same: A single measurement is not enough to yield a clear view of a company’s financial and operating condition.

Many of the ratios in this book are of the non-financial variety, such as mean time between failures, the science linkage index, and the quote to close ratio. Managers have a difficult time creating a linkage between these non-financial measures and improvement. A common result is for managers to impose a broad range of non-financial measurements upon a company, hoping that some behavior changes will result in improved financial performance. A better approach is to conduct a detailed review of the financial performance drivers of a business, and to only measure the results of non-financial measurements that are likely to have a direct impact on those financial measures. For example, a consulting business is experiencing significant delays in the completion of customer projects, which delays revenue generation; the delays are caused by a high level of employee turnover, requiring long lead times to bring in qualified replacement staff. Thus, a reasonable non-financial measurement in this case is the annual employee turnover percentage, since there is a direct linkage between it and revenue generation.

Once non-financial measurements are selected, be sure to verify that improvements in the activities being measured are actually resulting in altered financial performance. There is often merely an assumption that enhancements to a non-financial activity will improve financial performance, but no one has actually tested the assumption. This verification step will ensure that measures that do not assist in improving financial results are thrown out.

A major problem with measurement systems is inconsistency of application. If a company has multiple locations, then it must have a system in place for ensuring that the same measure is calculated in exactly the same way in every location. Local managers can be quite skilled at tweaking measurement systems to reveal the best possible results, frequently by excluding some data from measurements, altering the date ranges over which data is collected, or by altering the measurements themselves. This issue can be monitored through the use of occasional internal audits, or with centralized measurements systems that keep local managers from being involved in the measurement process.

Even if a company has developed a reasonable set of measurements, this does not mean that they should never be changed. On the contrary, measured items will generally gather a great deal of management attention and then improve to the point where they no longer change—thereby resulting in a stale set of measurements. For example, inventory accuracy can improve only to 100%. At this point, the measurement is needed on a monitoring basis to ensure that it does not degrade, while a new measurement can be created to be the focus of corporate attention. However, there will be a few measurements, usually involving sales levels and break-even points, that will always be the centerpiece of any measurement system, since they bring attention to bear on the most crucial revenue and cost elements of the business. Thus, a properly designed measurement system should include a few key items that will be constant for many years, accompanied by other measures that are used for internal improvement purposes and will change in concert with corporate objectives.

A final warning: Do not become so enamored of measurement systems that you burden the company with a wild profusion of measurements that track every conceivable activity, since this causes several problems. first, no one knows which of the measures are most useful for tracking the company’s ability to achieve its mission. Therefore, they try to perform well under all of the measures, resulting in resources being allocated to the improvement of some measures that have no bearing on financial performance. Second, employees may engage in irrational behavior in order to achieve high scores through the measurement system, even if they must downgrade their performance in areas not being measured.

This book is filled with over 200 financial and operational measurements that have proven to be of considerable use to the author in tracking the performance of many companies in a variety of industries. If you would like to see other measurements in the next edition of this book, please send your request to the author at [email protected].

2

Asset Utilization Measurements

This chapter focuses on the ratios and formulas that can be derived primarily from the income statement. There are several that require additional information from the balance sheet, as well as internal information, such as employee headcount, that may not be readily discernible from published financial statements. The general intent of the analysis tools presented here is to show a company’s ability to sustain its sales, the level of asset and expense usage required to do so, and the sustainability of its current sales and expense levels. There are also specialized ratios that deal with such issues as sales returns, repairs and maintenance, fringe benefits, interest expense, and overhead rates.

Each of the following sections describes the uses of a ratio or formula, explains the proper method of calculation, and gives an example. Each section also discusses how each ratio or formula can be misused, skewed, or incorrectly applied.

The ratios and formulas presented in this chapter are:

Sales to Working Capital Ratio

Sales to Fixed Assets Ratio

Sales to Administrative Expenses Ratio

Sales to Equity Ratio

Sales per Person

Sales Backlog Ratio

Sales Returns to Gross Sales Ratio

Repairs and Maintenance Expense to Fixed Assets Ratio

Accumulated Depreciation to Fixed Assets Ratio

Fringe Benefits to Wages and Salaries Expense

Sales Expenses to Sales Ratio

Discretionary Cost Ratio

Interest Expense to Debt Ratio

Foreign Exchange Ratios

Overhead Rate

Goodwill to Assets Ratio

Overhead to Cost of Sales Ratio

Investment Turnover

Break-Even Point

Margin of Safety

Tax Rate Percentage

SALES TO WORKING CAPITAL RATIO

Description: It is exceedingly important to keep the amount of cash used by an organization at a minimum, so that its financing needs are reduced. One of the best ways to determine changes in the overall use of cash over time is the ratio of sales to working capital. This ratio shows the amount of cash required to maintain a certain level of sales. It is most effective when tracked on a trend line, so that management can see if there is a long-term change in the amount of cash required by the business in order to generate the same amount of sales. For instance, if a company has elected to increase its sales to less creditworthy customers, it is likely that they will pay more slowly than regular customers, thereby increasing the company’s investment in accounts receivable. Similarly, if the management team decides to increase the speed of order fulfillment by increasing the amount of inventory for certain items, then the inventory investment will increase. In both cases, the ratio of working capital to sales will worsen because of specific management decisions. This ratio is also used for budgeting purposes, since budgeted working capital levels can be compared to the historical amount of this ratio to see if the budgeted working capital level is sufficient.