By Geoff Coy, Certified Practising Accountant
In the last issue, I finished off by stating that any financial information you prepare or receive for your business should be prepared on a regular basis, received on time, meaningful and precise and easy to read and interpret.
Your reports should also contain some or all of the following information to assist you to identify any underlying problems:
Let me explain some of these terms.
In other words non-fuel sales comprise 25% of total sales and generate 80% of the total gross profit.
It is important to monitor the sales mix of your business so that attention can be given to those areas that generate the most profit.
The gross profit margin should be stable over time. A persistent gradual decrease is likely to indicate that productivity needs to be increased to return profitability back to previous levels.
The calculation used to obtain the ratio is:
Gross Profit Margin = |
Gross Profit Sales |
x 100 |
Recent studies indicate that the expected average gross margin is 32% for shop sales and 62% for workshop sales.
Due to the volatile nature of fuel prices it is more appropriate to calculate and compare the gross profit from fuel in terms of a cent per litre margin. The current fuel margin for metropolitan sites is in the range of 2.5 cents to 3.5 cents per litre before fuel losses.
A high ratio may indicate positive factors such as good stock demand and management. A low ratio may indicate that either stock is naturally slow moving or such problems as the presence of obsolete stock or good presentation. A low ratio can also be indicative of potential stock valuation issues. It is a good idea to monitor the ratio over consecutive financial years to determine if a trend is developing.
It can be useful to compare this financial ratio with the working capital ratio. For example business operations with low stock turnover tend to require higher working capital.
The calculation used to obtain the ratio is:
Stock Turnover Ratio =
|
Cost of Goods
Average Stock |
x 30 days
|
The industry average stock turn rate is currently 37 days. This represents a combination of both fuel and non fuel.
The calculation indicates the average sales your business needs to achieve to cover costs and a desired profit level.
Breakeven calculation can be useful if you are considering expanding your business. If you are looking at expanding, it is also worth considering how much extra working capital you will require, particularly if you have a high stock holding or have a high percentage of credit sales.
Breakeven point =
|
Net Profit + overheads
Gross Profit Margin |
For example if you wish to make $5,000 profit per month, overheads are $50,000 per month and gross profit margin is 12.5% then sales of $440,000 per month will need to be achieved.
A working capital ratio of 2:1 is regarded as desirable. However the circumstances of every business is different, and you should consider how your business operates and set an appropriate benchmark ratio.
A stronger ratio indicates a better ability to meet ongoing and unexpected bills, therefore taking the pressure off your cash flow. A weaker ratio may indicate that your business is having greater difficulties meeting its short-term commitments and that additional working capital support is required. Having to pay bills before payments are received may be the issue in which case an overdraft could assist.
The calculation used to obtain the ratio is:
Working Capital Ratio =
|
Current Assets
Current Liabilities |
Being in business means facing the new challenges that competition, technology, environmental regulations and safety agencies (to name just a few) present. All this makes it difficult to stay in business - let alone increase business.
Being in business is about taking risks. However, you can minimise the risks if you are armed with the necessary information about you business.