Financial Management 101. Angie Mohr

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СКАЧАТЬ a lender, the higher the ratio, the more secure is their investment in your business. The same is generally true for you as the business manager; you want the ratio to be at least one or greater. However, if your current ratio is higher than normal for your business, it may indicate that you are not using your resources effectively. This might happen because you have one (or all) of the following situations:

      • Abnormally high inventory levels (i.e., you are over-stocking the pantry)

      • Surplus cash sitting in the bank that should be invested long term (or used to pay down current liabilities)

      • An accounts receivable collection problem

      Total debt ratio

      The total debt ratio measures the long-term solvency of your business. It shows you how highly your business is leveraged, or in debt. The total debt ratio is calculated as:

       Total debt ratio = Total debt ÷ Total assets

      Just like the current ratio, you can express the total debt ratio in dollars or times. For example, if a business has a total debt of $12,673 and total assets of $9,412, its total debt ratio would be —

       Total debt ratio = Total debt ÷ Total assets

       = $12,673 ÷ $9,412 = 1.35 : 1

      In other words, for every dollar you have in assets, the business has $1.35 in liabilities. You could also say that the business is leveraged 135 percent or that its assets cover its liabilities 0.74 times over ($9,412 ÷ $12,673).

      In the case of the total debt ratio, you would want the result to be one or less. The lower the ratio, the less total debt the business has in comparison with its asset base.

      The total debt ratio would be of interest to your long-term lenders. For example, if your business owned the plant in which it operates and the bank has loaned the business money by way of mortgage against the property, the bank would be very interested in the long-term health of your business. Highly leveraged businesses risk becoming insolvent and declaring bankruptcy.

      Asset and debt management ratios

      Asset and debt management ratios tell you how well your business is managing its resources to generate sales. There are four main ratios in this category:

      • Inventory turnover

      • Receivables turnover

      • Payables turnover

      • Times interest earned

      Inventory turnover

      The inventory turnover ratio answers the question, “How long does my inventory sit before it gets sold?” This is an important question because there are warehousing and other costs associated with holding inventory. The ratio is calculated as follows:

       Inventory turnover = Cost of goods sold ÷ Ending inventory

      If a business’s cost of goods sold (cogs) during a period is $87,621 and its cost of goods remaining in inventory at the end of the period is $9,783, the inventory turnover ratio would be —

       Inventory turnover = $87,621 ÷ $9,783 = 9.0 times

      We could say that we can turn over our inventory nine times in a year. A more useful interpretation is to calculate days’ sales in inventory, which is —

       365 days/Inventory turnover = 365 ÷ 9.0 = 40.6 days

      This tells us that, on average, the inventory sits for almost 41 days before it is sold. Some businesses use the average inventory for the year (beginning inventory plus ending inventory divided by two) and some businesses use the ending inventory for this calculation. It all depends on what you want to track. Using average inventory gives you a historical perspective (i.e., what happened during the year), whereas using the ending inventory gives you a forward look at your current inventory levels.

      In general, you would want this ratio to be as low as possible without having chronic shortages of inventory on hand. In a perfect world, inventory would materialize at exactly the time it’s needed for a sale. The inventory turnover ratio tells you how long you generally hold the inventory before it’s sold.

      Receivables turnover

      While the inventory turnover ratio tells you how quickly you can sell your goods, the receivables turnover ratio tells you how quickly you generally get the money for the sale into your bank account. The receivables turnover ratio is calculated much like the inventory turnover ratio:

       Receivables turnover = Sales ÷ Accounts receivable

      If your sales were $113,423 and your receivables balance was $18,903, the ratio would be calculated as —

       Receivables turnover = $113,423 ÷ $18,903 = 6.0 times

      We can also look at the average number of days before collection:

       Days’ sales in receivables = 365 days ÷ Receivables turnover

       = 365 ÷ 6.0 = 60.8 days

      This tells us that, on average, we collect our receivables in just over 60 days. If our credit terms are net 30, this indicates a problem. We would need to examine our credit and collection policies to find out why we don’t get our money in 30 days.

      Payables turnover

      Payables turnover is the flip side of the receivables turnover. It tells us how quickly we pay our suppliers. It is calculated as:

       Payables turnover = COGS ÷ Accounts payable

      If our cost of goods sold is $87,621 and our payables are $16,411, the payables turnover ratio would be calculated as —

       Payables turnover = COGS ÷ Accounts payable

       $87,621 ÷ $16,411 = 5.3 times

      The average number of days before we pay our suppliers is —

       = 365 days ÷ Payables turnover

       = 365 days ÷ 5.3 = 68.9 days

      This tells us that, on average, we pay our suppliers in almost 69 days. If our suppliers’ terms are net 30, we are probably incurring late payment penalties and interest. This isn’t the most efficient use of our resources. On the other hand, if our suppliers’ terms are net 30 and we pay on average in 15 days, we are prepaying our liabilities, which also is not a good use of our resources.

      Times СКАЧАТЬ