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Understanding financial ratios

Financial ratios are useful tools for business owners to monitor, analyse and improve their business performance.

A financial ratio contains one or more financial figures and is expressed as a ratio, rate or percentage. Financial ratios are used to measure profitability, cash flow and liquidity, risk and return, and stock turnover and sales.

Here are some common financial ratios used in business to:

– Measure profitability
Gross profit margin is a percentage of gross profit on sales.
To work out: (Gross profit x 100) divided by sales.

Net profit margin is a percentage of net profit on sales.
Method: (Net profit before tax x 100) divided by sales.

– Monitor cash and liquidity
Working capital ratio measures the liquidity of a business (i.e. how much money is available to meet creditors’ demands).
To determine this ratio: Working capital = current assets divided by current liabilities.

Quick assets ratio measures the solvency of your business, or its ability to meet its immediate commitments.
Method: Current assets (minus stock) divided by current liabilities.

– Measure turnover and sales
Stock turnover ratio measures the number of times stock turns over.
Method: Cost of goods sold divided by (0.5 x opening + closing stock)

Material to sales ratio measures the percentage of sales dollars spent on materials.
To determine this ratio: (Direct materials x 100) divided by sales.

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News

Amnesty means that 24,000 businesses own up to underpaying Aussies superannuation

September 24, 2020

An amnesty scheme which ended earlier this month has caused around 24,000 businesses to admit to underpayment of their worker’s super. A total of 588 million dollars will be distributed to almost 400,00 individuals.

The scheme, which covered payments from the introduction of super in 1992, gave employers the opportunity to come clean without any consequences as long as they paid the unpaid super as well as 10% interest for every year the money was overdue.

The ATO will be directing its attention at any businesses that did not admit fault and these businesses will face severe penalties.

Many individuals are looking to access their superannuation early in order to have support during these times. Although there is criticism of early access to super, this facility has been helpful to many families to keep afloat.