Overview
Required reading for anyone starting, running, or growing a business, Business Ratios and Formulas, Third Edition puts answers at the fingertips of business managers, with nearly 250 operational criteria and clear, easy-to-understand explanations that can be used right away. The Third Edition includes twenty new measurements.
- Approximately 20 new measurements
- Offers a comprehensive resource of nearly 250 operational criteria
- An Appendix including a dictionary of accounting and finance terms
- A thorough list of every ratio and formula, and how to compile and interpret that information
- Also by Steven M. Bragg: Fast Close: A Guide to Closing the Books Quickly, Second Edition
An ideal tool for measuring corporate performance, this authoritative resource allows you to pick and choose the tools you need to best assess your organization's performance.
Product Details
| ISBN-13: | 9781118239827 |
|---|---|
| Publisher: | Wiley |
| Publication date: | 02/23/2012 |
| Series: | Wiley Corporate F&A , #577 |
| Sold by: | JOHN WILEY & SONS |
| Format: | eBook |
| Pages: | 384 |
| Sales rank: | 1,049,805 |
| File size: | 5 MB |
About the Author
Read an Excerpt
Business Ratios and Formulas
A Comprehensive GuideBy Steven M. Bragg
John Wiley & Sons
ISBN: 0-471-39643-5Chapter One
IntroductionEvery department in every business produces some kind of information that can be used by its manager to measure performance. This information may be related to operational considerations within the department, the financial condition of the entire company, or the performance of a company's suppliers and customers. Unfortunately, managers may not be aware of the multitude of measurements that can be used to track these different levels of performance or of the ways that these measurements can yield incorrect or misleading information.
This book is designed to help managers select the best possible set of measurements for a given situation. Chapters 2 through 13 itemize a series of performance measurements for different aspects of a company. Chapter 2 contains asset utilization measurements that can be used to determine a company's ability to sustain its sales, the level of asset and expense usage required to do so, and the sustainability of its current sales and expense levels. There are also specialized ratios that deal with such issues as sales returns, repairs and maintenance, fringe benefits, interest expense, and overhead rates.
Chapter 3 contains operating performance measurements, which describe an organization's operating performance in such areas as sales, gross margins, investment income, operatingprofit, and net profit.
Chapter 4 contains cash flow measurements, which are useful in determining the ability of a company's cash flows to keep it in business. These measurements should be used in conjunction with the liquidity measurements in Chapter 5, which focus on additional measurements related to cash flows, such as a company's ability to collect accounts receivable in an efficient manner, use its inventory within a short time frame, pay its accounts payable when due, and generally maintain a sufficient amount of liquid funds to pay off short-term liabilities. Chapter 6 contains capital structure and solvency measurements, which determine the relationship between a company's debt and equity, as well as the comparative proportions of different types of stock. It also addresses a company's ability to remain solvent and so can be used in conjunction with Chapters 4 and 5.
Chapter 7 contains return on investment measurements, which encompass net worth, several types of return on assets and equity, earnings per share, economic value added, and return on dividends. Chapter 8 addresses a company's financial market performance by describing such measurements as the price/earnings ratio, several variations on the stock options to common shares ratio, market value added, and the cost of capital.
Chapters 9 through 13 cover measurements for individual departments. These chapters are devoted to performance measurements for the accounting, engineering, logistics, production, and sales departments. In contrast to Chapters 2 through 8, which are devoted to measurements that are primarily used by the accounting and finance functions, Chapters 9 through 12 are more concerned with such issues as work capacity levels, efficiency, and effectiveness, which in many cases require no financial information at all. For example, measurements in Chapter 11, which deals with logistics, cover such topics as production schedule accuracy, the on-time parts delivery percentage, and picking accuracy for assembled products.
Chapter 14 covers a variety of topics related to measurements using the Microsoft Excel electronic spreadsheet, including how to set up comprehensive sets of measurements that can be used for proportional, leverage, ratio, and trend analyses. It also covers a variety of spreadsheet formulas and report formats for forecasting, cash flow analysis, capital asset purchase analysis, interest compounding, investment analysis, and risk analysis.
The book concludes with an appendix and glossary. The Appendix lists the names and formulations of every measure in the book, sorted by chapter. This list should only be used with the precautions given for them in their respective chapters to ensure their proper use. The Glossary covers the definitions of the terms found in many of the measurements listed in this book, to clarify the exact types of information needed.
The chapters containing measurements (Chapters 2 through 13) have an identical structure. Each begins with a table that lists the measurements described in it, which one can use to quickly access a needed calculation. Thereafter, each chapter is broken down into the discussion of individual measurements. Within each measurement section there are a description, formula, example, and discussion of cautionary items. The description typically notes how the measurement is used and who uses it. The formula shows any variations on the calculation and what types of data to include or exclude from it. The example is generally a complete scenario that describes how the measurement is used in a simulated business situation. Finally, any cautionary items are noted; these can include the ways in which the measurement can be altered to yield incorrect results, or what other measurement should be used with it in order to yield a more comprehensive set of information.
The reader may use this book to search for a single calculation, which can be used for highly targeted needs. However, a better approach is to peruse the entire book, with the objective of developing a complete set of measurements that will yield a more comprehensive view of a company's entire operating and financial situation. For example, a CFO might be interested in a company's stock market performance and therefore watches only the price/earnings ratio. However, this single measurement focuses only on the perception of investors with regard to a company's future earnings potential. A more rounded set of measurements might include the days of sales backlog (since it indicates future changes in sales volume), production capacity utilization (since it shows the ability of the company to produce its incoming sales), and the days of accounts receivable (since it shows the company's ability to convert sales into cash). The exact set of measurements will change in accordance with a company's industry, size, operational configuration, and degree of financial leverage, but one issue will remain the same: A single measurement is not enough to yield a clear view of a company's financial and operating condition.
Even if a company has developed a reasonable set of measurements, this does not mean that they should never be changed. On the contrary, measured items will generally gather a great deal of management attention and then improve to the point where they no longer change-thereby resulting in a stale set of measurements. For example, inventory accuracy can improve only to 100%. At this point, the measurement is needed on a monitoring basis to ensure that it does not degrade, while a new measurement can be created to be the focus of corporate attention. However, there will be a few measurements, usually involving sales levels and break-even points, that will always be the centerpiece of any measurement system, since they bring attention to bear on the most crucial revenue and cost elements of the business. Thus, a properly designed measurement system should include a few key items that will be constant for many years, accompanied by other measures that are used for internal improvement purposes and will change in concert with corporate objectives.
This book is filled with nearly 200 financial and operational measurements that have proven to be of considerable use to the author in tracking the performance of many companies in a variety of industries. If you would like to see other measurements in the next edition of this book, please send your request to the author at brasto@aol.com.
(Continues...)
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Table of Contents
Preface xvAcknowledgments xvii
Chapter 1: Introduction 1
Chapter 2: Asset Utilization Measurements 5
Sales to Working Capital Ratio 6
Sales to Fixed Assets Ratio 7
Sales to Administrative Expenses Ratio 8
Sales to Equity Ratio 9
Sales per Person 10
Sales Backlog Ratio 12
Sales Returns to Gross Sales Ratio 13
Repairs and Maintenance Expense to Fixed Assets Ratio 14
Accumulated Depreciation to Fixed Assets Ratio 15
Capital to Labor Ratio 17
Fringe Benefits to Wages and Salaries Expense 18
Sales Expenses to Sales Ratio 19
Discretionary Cost Ratio 19
Interest Expense to Debt Ratio 20
Foreign Exchange Ratios 21
Overhead Rate 22
Goodwill to Assets Ratio 25
Overhead to Cost of Sales Ratio 26
Investment Turnover 27
Break-Even Point 28
Margin of Safety 29
Tax Rate Percentage 30
Chapter 3: Operating Performance Measurements 31
Operating Assets Ratio 31
Sales to Operating Income Ratio 33
Sales Margin 34
Gross Profit Percentage 34
Gross Profit Index 35
Investment Income Percentage 36
Operating Profit Percentage 38
Operating Leverage Ratio 39
Net Income Percentage 40
Core Operating Earnings 41
Profit per Customer Visit 42
Profit per Person 43
Core Growth Rate 44
Quality of Earnings Ratio 45
Chapter 4: Cash Flow Measurements 47
Cash Flow from Operations 47
Free Cash Flow 49
Cash Flow Return on Sales 50
Fixed Charge Coverage 51
Expense Coverage Days 52
Cash Flow Coverage Ratio 54
Cash Receipts to Billed Sales and Progress Payments 55
Cash to Current Assets Ratio 55
Cash Flow to Fixed Asset Requirements 56
Cash Flow Return on Assets 58
Cash to Working Capital Ratio 59
Cash Reinvestment Ratio 60
Cash to Current Liabilities Ratio 61
Cash Flow to Debt Ratio 62
Reinvestment Rate 63
Stock Price to Cash Flow Ratio 64
Dividend Payout Ratio 65
Chapter 5: Liquidity Measurements 67
Accounts Receivable Turnover 68
Average Receivable Collection Period 69
Days Delinquent Sales Outstanding 70
Days Sales in Receivables Index 71
Accounts Receivable Investment 72
Ending Receivable Balance 73
Inventory to Sales Ratio 74
Inventory Turnover 75
Inventory to Working Capital Ratio 77
Liquidity Index 78
Accounts Payable Days 79
Accounts Payable Turnover 80
Current Ratio 81
Quick Ratio 82
Cash Ratio 83
Sales to Current Assets Ratio 84
Working Capital Productivity 85
Days of Working Capital 86
Weighted Working Capital 87
Defensive Interval Ratio 88
Current Liability Ratio 89
Required Current Liabilities to Total Current Liabilities Ratio 90
Working Capital to Debt Ratio 91
Risky Asset Conversion Ratio 92
Noncurrent Assets to Noncurrent Liabilities Ratio 93
Short-Term Debt to Long-Term Debt Ratio 94
Altman’s Z-Score Bankruptcy Prediction Formula 95
Chapter 6: Capital Structure and Solvency Measurements 99
Times Interest Earned 99
Cash Coverage Ratio 100
Debt Coverage Ratio 101
Asset Quality Index 102
Accruals to Assets Ratio 104
Times Preferred Dividend Earned 105
Debt to Equity Ratio 107
Funded Capital Ratio 108
Retained Earnings to Stockholders’ Equity 109
Preferred Stock to Total Stockholders’ Equity 110
Issued Shares to Authorized Shares 111
Chapter 7: Return on Investment Measurements 113
Net Worth 113
Book Value per Share 115
Tangible Book Value 116
Return on Assets Employed 117
Return on Infrastructure Employed 119
Return on Operating Assets 120
Return on Equity Percentage 121
Return on Common Equity 122
Financial Leverage Index 123
Equity Growth Rate 124
Earnings per Share 125
Percentage Change in Earnings per Share 126
Economic Value Added 127
EVA Momentum 129
Relative Value of Growth 130
Dividend Payout Ratio 131
Dividend Yield Ratio 133
Chapter 8: Market Performance Measurements 135
Insider Stock Buy-Sell Ratio 135
Institutional Capture Rate 137
Market Value Added 138
Enterprise Value/Earnings Ratio 139
Stock Options to Common Shares Ratio 140
Cost of Capital 142
Sales to Stock Price Ratio 144
Price/Earnings Ratio 145
Capitalization Rate 146
Chapter 9: Measurements for the Accounting/Finance Department 147
Purchase Discounts Taken to Total Discounts 148
Percentage of Payment Discounts Missed 149
Transactions Processed per Person 150
Transaction Error Rate 151
Average Time to Issue Invoices 152
Average Employee Expense Report Turnaround Time 154
Payroll Transaction Fees per Employee 155
Time to Produce Financial Statements 157
Percentage of Tax Filing Dates Missed 158
Proportion of Products Costed Prior to Release 159
Internal Audit Savings to Cost Percentage 160
Internal Audit Efficiency 161
Deduction Turnover 162
Bad Debt Percentage 163
Percent of Receivables over XX Days Old 164
Allowance Exhaustion Rate 165
Percentage Collected of Dollar Volume Assigned 166
Cash Collected per Aging Bucket 167
Collection Effectiveness Index 168
Best Possible DSO 169
Partial Payment Agreement Percentage 170
Percent of Cash Applied on Day of Receipt 171
Auto Cash Hit Rate 172
Unmatched Receipts Exposure 172
Cost of Credit 173
Earnings Rate on Invested Funds 174
Brokerage Fee Percentage 175
Borrowing Base Usage Percentage 176
Chapter 10: Measurements for the Engineering Department 179
Bill of Materials Accuracy 179
Labor Routing Accuracy 181
Idea Kill Rate 182
Percentage of New Products Introduced 183
Percentage of Sales from New Products 184
Percentage of New Parts Used in New Products 185
Percentage of Existing Parts Reused in New Products 186
Average Number of Distinct Products per Design Platform 187
Percentage of Products Reaching Market before Competition 188
Return on Innovation Investment 189
Intangibility Index 189
Science Linkage Index 190
Ratio of Actual to Target Cost 191
Warranty Claims Percentage 192
Time from Design Inception to Production 193
Percentage of Floor Space Utilization 194
Chapter 11: Measurements for the Human Resources Department 197
Employee Turnover 197
Average Time to Hire 198
Late Personnel Requisitions Ratio 199
Sendouts per Hire 200
Intern Hiring Percentage 201
Ratio of Support Staff to Total Staff 201
Employment Cost Effectiveness 202
Chapter 12: Measurements for the Logistics Department 205
Production Schedule Accuracy 206
Economic Order Quantity 207
Number of Orders to Place in a Period 208
Economic Production Run Size 209
Raw Material Inventory Turns 209
Raw Material Content 210
Finished Goods Inventory Turns 211
Obsolete Inventory Percentage 212
Percentage of Inventory > XX Days Old 213
Percentage of Returnable Inventory 214
Excess Inventory Index 215
Inventory Accuracy 216
Percentage of Certified Suppliers 217
Electronic Data Interchange Supplier Percentage 218
Distribution Turnover 219
Supplier Fill Rate 220
On-Time Parts Delivery Percentage 221
Purchased Component Defect Rate 223
Incoming Components Correct Quantity Percentage 224
Percentage of Actual Payments Varying from Purchase Order Price 225
Percentage of Purchase Orders Issued below Minimum Dollar Level 226
Proportion of Corporate Credit Card Usage 227
Percentage of Receipts Authorized by Purchase Orders 228
Freight Audit Recovery Ratio 230
Picking Accuracy for Assembled Products 231
Order Fill Rate 231
Average Time to Ship 232
On-Time Delivery Percentage 234
Dock-to-dock Time 234
Percentage of Products Damaged in Transit 236
Percentage of Sales through Distributors 237
Chapter 13: Measurements for the Production Department 239
Constraint Productivity 240
Takt Time 240
Constraint Rework Percentage 241
Constraint Schedule Attainment 242
Constraint Utilization 243
Operational Equipment Effectiveness 244
Degree of Unbalance 245
Throughput Effectiveness 246
Manufacturing Critical Path Time 248
Manufacturing Efficiency 249
Break-Even Plant Capacity 250
Manufacturing Effectiveness 251
Productivity Index 252
Unit Output per Direct Labor Hour 253
Average Equipment Setup Time 255
Unscheduled Machine Downtime Percentage 255
Mean Time between Failures 257
Acceptable Product Completion Percentage 258
Work-in-Process Turnover 259
Work-in-Process to Standard Work-in-Process 260
Scrap Percentage 261
First-Time-Through Yield 262
Warranty Claims Percentage 263
Maintenance Expense to Fixed Assets Ratio 264
Indirect Expense Index 265
Reorder Point 266
On-Time Delivery Ratio 268
Chapter 14: Measurements for the Sales and Marketing Department 271
Market Share 271
Customer Turnover 272
Advertising Value Equivalency 273
Net Promoter Score 274
Browse-to-Buy Conversion Ratio 275
Recency 276
Direct Mail Effectiveness Ratio 277
Inbound Telemarketing Retention Ratio 279
Proportion of Completed Sales to Home Page Views 280
Quote to Close Ratio 281
Pull-Through Rate 282
Sales per Salesperson 283
Sales Productivity 284
Sales Effectiveness 285
Sales Trend Percentage by Product Line 286
Product Demand Elasticity 287
Days of Backlog 288
Chapter 15: Measurement Analysis with an Electronic Spreadsheet 291
Financial Statement Proportional Analysis 292
Financial Statement Ratio Analysis 294
Automated Ratio Result Analysis 296
Leverage Analysis 297
Trend Analysis 298
Forecasting 299
Cash Flow Analysis 303
Capital Asset Analysis 305
Compounding Analysis 307
Investment Analysis 309
Risk Analysis 311
Appendix: Measurement Summary 313
Glossary 339
About the Author 345
Index 347