Reading Your Financials
In a recent post we talked about financials: What they are and why it is important to have them on a regular basis. In this post we are going to explain how to read them and what they are telling you.
There are several ways to gather information from your reports.
Run comparative reports:
This month vs year to date.
This month vs this month last year
This month vs budget
All of these reports can be run from most accounting software.
Ratios are very helpful to give you a snapshot of where your company is at.
Gross Profit % or GP%
(Gross Profit / Sales) x 100 = GP %
The gross profit % illustrates what % of your revenue is available after paying your costs of goods sold and before your general operating expenses for your business.
Net Profit % or NP%
(Net Profit / Sales) x 100 = Net Profit %
The Net Profit % illustrates what % of your revenue is available after paying all business expenses. You can compare this % to the industry average, your past periods or your targets. This will highlight if expenses need to be reduced or income increased or both.
Working Capital Ratio (also known as the current ratio)
The working capital ratio is a liquidity ratio i.e. how liquid a business is. You like to see this ratio at 2:1 Anything less than 1 that means that the company cannot pay all of its liabilities by liquidating its assets. Higher means the company can pay all of its debts and still have working capital available.
Quick Ratio - or acid test
Current Assets - Inventory
You like to see this ratio at 1:1. That shows that your liquid assets can cover your liabilities without selling off inventory which can take longer to liquidate.
Please reach out to the Handle It team if you have any questions on these topics. firstname.lastname@example.org, 833-202-7676