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Profitability Sustainability Ratios How well is our business performing over a specific period, will your social enterprise

have the financial resources to continue serving its constituents tomorrow as well as today?

Ratio Sales Growth = Current Period Previous Period Sales Previous Period Sales

What does it tell you? Percentage increase (decrease) in sales between two time periods !f overall costs and inflation are increasing, then you should see a corresponding increase in sales !f not, then may need to ad"ust pricing policy to #eep up with costs &easures the composition of an organi'ation(s revenue sources (e)amples are sales, contributions, grants) %he nature and ris# of each revenue source should be analy'ed !s it recurring, is your mar#et share growing, is there a long term relationship or contract, is there a ris# that certain grants or contracts will not be renewed, is there ade*uate diversity of revenue sources? +rgani'ations can use this indicator to determine long and short,term trends in line with strategic funding goals (for e)ample, move towards self,sufficiency and decreasing reliance on e)ternal funding) &easures the degree to which the organi'ation(s e)penses are covered by its core business and is able to function independent of grant support

Reliance on Revenue Source = $evenue Source %otal $evenue%otal $evenue

Operating Self-Sufficiency = -usiness $evenue %otal .)penses /or the purpose of this calculation, business revenue should e)clude any non, operating revenues or contributions %otal e)penses should include all e)penses (operating and non,operating) including social costs 0 ratio of 1 means you do not depend on grant revenue or other funding How much profit is earned on your products without considering indirect costs !s your gross profit margin improving? Small changes in gross margin can significantly affect profitability !s there enough gross profit to cover your indirect costs !s there a positive gross margin on all products? How much money are you ma#ing per every 4 of sales %his ratio measures your ability to cover all operating costs including indirect costs Percentage of indirect costs to sales

Gross Profit Margin = 2ross Profit %otal Sales %otal Sales et Profit Margin = 3et Profit Sales SG! to Sales =

!ndirect Costs (sales, general, admin) 5oo# for a steady or decreasing ratio which means you are controlling Sales overhead &easures your ability to turn assets into profit %his is a very useful measure of comparison within an industry Return on !ssets = 3et Profit 0verage %otal 0ssets 0 low ratio compared to industry may mean that your competitors have found a way to operate more efficiently 0fter ta) interest e)pense can be added bac# to numerator since $+0 measures profitability on all assets whether or not they are financed by e*uity or debt $ate of return on investment by shareholders %his is one of the most important ratios to investors 0re you ma#ing enough profit to compensate for the ris# of being in business? How does this return compare to less ris#y investments li#e bonds?

Return on "#uity = 3et Profit 0verage Shareholder .*uity

Operational "fficiency Ratios How efficiently are you utili'ing your assets and managing your liabilities? %hese ratios are used to compare performance over multiple periods

Ratio Operating "$pense Ratio =

What does it tell you? Compares e)penses to revenue

+perating .)penses 0 decreasing ratio is considered desirable since it generally indicates increased %otal $evenue efficiency !ccounts Receivable %urnover = 3umber of times trade receivables turnover during the year 3et Sales 0verage 0ccounts $eceivable %he higher the turnover, the shorter the time between sales and collecting cash &ays in !ccounts Receivable = 0verage 0ccounts $eceivable Sales ) 678 'nventory %urnover = Cost of Sales 0verage !nventory &ays in 'nventory = 0verage !nventory Cost of Sales ) 678 !ccounts Payable %urnover = Cost of Sales 0verage 0ccounts Payable &ays in !ccounts Payable = 0verage 0ccounts Payable Cost of Sales ) 678 %otal !sset %urnover = $evenue 0verage %otal 0ssets (i$ed !sset %urnover = $evenue 0verage /i)ed 0ssets )i#uidity Ratios ;oes your enterprise have enough cash on an ongoing basis to meet its operational obligations? %his is an important indication of financial health 9hat are your customer payment habits compared to your payment terms :ou may need to step up your collection practices or tighten your credit policies %hese ratios are only useful if ma"ority of sales are credit (not cash) sales

%he number of times you turn inventory over into sales during the year or how many days it ta#es to sell inventory %his is a good indication of production and purchasing efficiency 0 high ratio indicates inventory is selling *uic#ly and that little unused inventory is being stored (or could also mean inventory shortage) !f the ratio is low, it suggests overstoc#ing, obsolete inventory or selling issues

%he number of times trade payables turn over during the year %he higher the turnover, the shorter the period between purchases and payment 0 high turnover may indicate unfavourable supplier repayment terms 0 low turnover may be a sign of cash flow problems Compare your days in accounts payable to supplier terms of repayment

How efficiently your business generates sales on each dollar of assets 0n increasing ratio indicates you are using your assets more productively

Ratio *urrent Ratio = Current 0ssets Current 5iabilities

What does it tell you? &easures your ability to meet short term obligations with short term assets , a useful indicator of cash flow in the near future 0 social enterprise needs to ensure that it can pay its salaries, bills and e)penses

on time /ailure to pay loans on time may limit your future access to credit and therefore your ability to leverage operations and growth 0 ratio less that 1 may indicate li*uidity issues 0 very high current ratio may mean there is e)cess cash that should possibly be invested elsewhere in the business or that there is too much inventory &ost believe that a ratio between (also #nown as Wor+ing *apital 1 < and < = is sufficient Ratio) %he one problem with the current ratio is that it does not ta#e into account the timing of cash flows /or e)ample, you may have to pay most of your short term obligations in the ne)t wee# though inventory on hand will not be sold for another three wee#s or account receivable collections are slow 0 more stringent li*uidity test that indicates if a firm has enough short,term assets (without selling inventory) to cover its immediate liabilities ,uic+ Ratio = Cash >0$ > &ar#etable Securities Current 5iabilities %his is often referred to as the ?acid test@ because it only loo#s at the company(s most li*uid assets only (e)cludes inventory) that can be *uic#ly converted to cash) 0 ratio of 1A1 means that a social enterprise can pay its bills without having to sell inventory 9C is a measure of cash flow and should always be a positive number !t measures the amount of capital invested in resources that are sub"ect to *uic# turnover 5enders often use this number to evaluate your ability to weather hard times &any lenders will re*uire that a certain level of 9C be maintained ;etermines the number of months you could operate without further funds received (burn rate)

Wor+ing *apital = Current 0ssets Current 5iabilities !de#uacy of Resources = Cash > &ar#etable Securities > 0ccounts $eceivable &onthly .)penses )everage Ratios

%o what degree does an enterprise utili'e borrowed money and what is its level of ris#? 5enders often use this information to determine a business(s ability to repay debt

Ratio

What does it tell you? Compares capital invested by ownersBfunders (including grants) and funds provided by lenders

&ebt to "#uity =

5enders have priority over e*uity investors on an enterprise(s assets 5enders want to see that there is some cushion to draw upon in case of financial difificulty %he Short %erm ;ebt > 5ong %erm more e*uity there is, the more li#ely a lender will be repaid &ost lenders impose ;ebt limits on the debtBe*uity ratio, commonly <A1 for small business loans %otal .*uity (including grants) %oo much debt can put your business at ris#, but too little debt may limit your potential +wners want to get some leverage on their investment to boost profits %his has to be balanced with the ability to service debt 'nterest *overage = &easures your ability to meet interest payment obligations with business income $atios close to 1 indicates company having difficulty generating enough cash flow .-!%;0 !nterest to pay interest on its debt !deally, a ratio should be over 1 8 .)pense