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Business Finance Consulting

Financial Ratios – Profitability Ratios

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A recent article in the Australian Financial Review explained that the three main reasons for business failures were: Poor Financial Management (28% of failures), poor Accounting (16%) and lack of Management experience (15%).

So Poor Financial Management is the main culprit in business failures. The Directors and the owners of a company need to monitor the financial performance of the business. Revenue, Gross Profit, Operating Profit are important elements, but they have limitations: Firstly, they vary considerably with the ups and downs of Revenue (seasonality), and secondly, an increase in Operating Profit does not always reflect good performance (if Operating Profit increases by 5% for example, while Revenue increases by 20%, it is a poor result).

Ratios do not have these limitations and that is why they are widely used to measure financial performance.

Let’s look at the first set of financial ratios: The Profitability Ratios.

Profitability ratios measure the business’ ability to generate profit as compared to its costs and expenses, over a period of time.

They are: The Gross Profit Ratio, the Operating Profit Ratio and the Profit Before Tax Ratio. Read more →

Stocktake

Doing A Stocktake Is In Your Interest!

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The end of Financial Year approaches and most businesses would typically be planning and organising their annual stocktake. Other companies may do one or several interim stocktakes during the year in order to better monitor their inventory and/or minimise the disruption of a full stocktake.

A stocktake is the verification of the items physically held in inventory (also called stock). Both the quantity and the condition of each item are checked. The purpose of a stocktake is to confirm that the real physical inventory of a company reconciles with the theoretical inventory held in the accounts.

The objectives of a stocktake are multiple:

  • To remove the items that are broken, damaged or that have become obsolete;
  • To learn of items that are no longer there;
  • To provide valuable information on slow moving items;
  • Last but not least, to reduce your taxable profit via inventory write-offs.

You would not want to pay taxes on a profit you did not make, would you?

Inevitably, a stocktake will end up with a list of discrepancies: Items unaccounted for, missing or that reduced in volume, density, quality, etc. Even the best companies with well implemented inventory procedures will have discrepancies: It is human nature or should I say it is “business nature”. Read more →