Risk analysis

There are various ratios that can be prepared to enable a business to compare itself to its performance in previous accounting periods and to also benchmark the business’ performance against other similar businesses.  Some of the ratios include:

  • Increase/Decrease in Sales Percentage – this is the percentage rate of increase of sales being compared to the previous year or accounting period.
  • Break-Even Sales – this is the amount of sales that have to be made at the business’ current gross profit margin, to cover the fixed and variable costs of running the business before any profit is earned.
  • Stock Turnover – how many times does the stock turn over in the year?  A higher turnover is normally considered better, as the business is not investing as much money in old stock.
  • Debtors’ Days Outstanding – this calculation gives the number of days the debtors are outstanding.
  • Creditors’ Ratio – measures the degree to which creditors are being used to finance the business.
  • Gross Profit Percentage – is calculated by dividing gross profit by sales, multiplied by 100/1.
  • Mark Up Percentage – is calculated by dividing gross profit by cost of sales, multiplied by 100/1.
  • Net Profit Percentage – this is calculated by expressing the net trading profit as a percentage of sales.
  • Net Profit Before Interest – this shows the net profit percentage if the business had no debt.
  • Expense Ratios – this is the calculation of key expense percentages against sales, so that comparisons can be made against sales and percentage in previous accounting period, budgets, benchmarked against other businesses.  Key expenses normally include wages and salary, employment on-costs, advertising and rent.
  • Sales per Person – you need to calculate the number of equivalent full-time employees in the business.  You do this by dividing the total hours worked by 38 to determine the number of full-time equivalent employees.  The sales figure is then divided by the calculated full-time equivalent number of employees, to determine average sales.
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