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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

Authority for super complaints introduced

December 14, 2018

The new Australian Financial Complaints Authority (AFCA) will make it easier for individuals and small businesses to make complaints about their superannuation financial firms.

The Coalition government has responded to criticisms of previous dispute resolution bodies by creating a new financial disputes framework. AFCA has been described as a “one-stop shop” that will improve outcomes for consumers and increase the efficiency of the dispute resolution process.

AFCA’s jurisdiction
AFCA has been given authority over a range of complaint areas including:

What you can make complaints about
Your super complaint to AFCA must adhere to its governing rules. AFCA has specific time limits for complaints but no monetary limits.

You can make complaints about: