These
calculations were tabulated on

When you
were in school,
there were ways of measuring your success. In the classroom,
you most likely received a letter grade of A, B, C, D, or
F. If you participated in sports, there was probably a scoreboard,
or a way of timing or measuring your efforts. As you worked
to improve, you could simply look at your previous grade or
score, and compare it to your most recent efforts.

Now that you are a part
of a business, you may think there are no more grades or scoreboards.
As you are now dealing with money as compared to athletics or
classrooms, knowing the score is even more important.

Profits Plus
Solutions has created for you this interactive page that will allow
you to enter information from your financial statements,
both the Profit & Loss Statement and the Balance Sheet,
to get an idea of where your business is. You will receive
the answers to 21 key formulas.

To maximize this page
to help your business, we would suggest:

* Get the most recent copy of
your financial sheets
* Enter the requested
numbers
* Any number that is
in more than one formula is automatically, placed
into each of the appropriate formulas
* Print a copy of the page with your key formula
information
* Repeat the exercise
when you have your next set of financial sheets
* Compare the results
* Reread the information
on formulas of interest to you

To go directly
to a particular formula click on its name. The ratios are
grouped according to the type of ratio information they
provide.

Liquidity:
Acid Ratio
Cash to Current Liabilities Ratio
Current Ratio

Activity:
Accounts
Receivable Aging
Accounts
Receivable Turnover
Days
of Inventory On Hand
Days
Sales Outstanding
Turn
Rate - cost method
Turn
Rate - retail method

Profitability:
Cost
of Goods Sold
Gross
Margin Return On Inventory
Gross
Profit Percentage
Individual Item Margin
Operating
Expenses as a Percentage
Operating Margin Per Square Foot
Personal
productivity Ratio
Return
on Assets
Return
on Equity
Sales
per employee
Sales
to Inventory Ratio
Space
productivity

Coverage:
Debt
to Equity Ratio
Debt
to Net Worth

Individual Item
Margin
Defined: You have
heard the question of, 'What is your margin on this item?'
Where we have a space for price, this must be the price the
item is sold for. This is where you could have an initial
markup, and an actual or final markup. For example if you
originally marked an item $10, and have marked it down to
$8, then $8 is the price you would enter. The cost can be
the cost from your supplier; it can also include the cost
of freight. Some businesses have freight as a separate line,
while others add the cost of freight to the cost of the item.

Computed: The Individual Item Margin
is calculated by taking the selling price of the item, subtract
the cost, and then divide the answer by the selling price.
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Price

$

Cost

$

%

Cost of Goods Sold
Defined: You have probably seen this item appear on a
financial statement. To the surprise of most people the cost
of goods sold is a calculation involving both products you have
sold and not sold.

Computed: Cost of Goods Sold is calculated by taking the inventory,
at cost, at the beginning of the month, add the cost of all
of the inventory purchases during the month, and then subtracting
the inventory on hand at the end of the month. The resulting
number is the cost of goods sold for that month.
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Beginning Inventory at
Cost

$

Purchases at Cost

$

Ending Inventory at Cost

$

$

Turn
Rat e - cost method
Defined: Ever have anyone ask you how
often you turn your merchandise? This is the number they are
looking for. The desirable answer varies from industry to industry.
For example, a grocery store is looking for a double-digit turn
rate. Most of general and specialty retail is looking for a greater
than 3.0 turn.

Computed: Taking the Cost of Goods Sold, and dividing
that number by the average inventory at cost on hand calculates the
Turn Rate . The average inventory on hand is determined
by taking the total of the 12 end of month inventory figures,
and diving by 12.
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Cost of Goods Sold

$

Average Inventory

$

Turn Rate - retail method
Defined: There are two ways to calculate the inventory turn rate. One is based on the cost of inventory while the other is based on inventory at retail. Totaling inventory at retail involves knowing the cost of the inventory and the gross margin. However, you have to know if you are considering the initial gross margin or the maintained gross margin. The initial gross margin is the percentage calculated as you first price the inventory. However, as merchandise is often sold for less than the original price, the resulting gross margin is referred to as maintained gross margin. You will see the maintained gross margin on the profit and loss (income) statement. Comparing the two methods of calculating inventory turn, the inventory turn rate at retail will be lower than the inventory turn rate at cost.

Calculated: This is a multi step calculation. While your balance sheet will have the inventory at cost, the number you want is the inventory at retail which is likely to be a calculation performed by your point of sale system. Take the inventory at retail for each of the last 12 months, add them together and divide by 12. The resulting number is the average inventory at retail. Take the total sales, which is always calculated at retail, for these same 12 months and add those 12 months together. Divide the total sales by the average inventory at retail and the resulting number will be the inventory turn at retail.
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Total Sales at Retail

$

Average Inventory at Retail

$

Current Ratio:
Defined: The current ratio tells you how 'liquid'
your business is, or in other words, how easy you can turn
your assets into cash. The more 'liquid' your business is,
the healthier it is considered to be. You want this number
to be 1.5 or higher. If your ratio is lower, you may be having
cashflow problems. However service businesses can be in the
1.1 to 1.3 range. With a higher ratio, you may have too much
money sitting in accounts receivable, prepaid expenses, or
inventory. The answer to this calculation is stated as a ratio
(i.e. 2.0:1).

Computed: Current Ratio is determined
by dividing the current assets by the current liabilities. Your
financial sheet is probably already divided into current assets
and long-term assets as well as current liabilities and long-term
liabilities. Current assets are those that can be converted to
cash within the next 12 months. This usually includes your cash
on hand, inventory, accounts receivable, as well as investments
such as c.d.s. Current liabilities are those that are expected
to be paid in the next 12 months. This would include your accounts
payable, and the next 12 months principle amount of any loan
you have.
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Current Assets

$

Total Liabilities

$

Debt to Net Worth
Defined: This is another measure of the health
of a business. The Debt to Net Worth compares the total
debt to the net worth of a company. The answer to this calculation
is stated as a ratio (i.e. 2.0:1).

Computed: Debt to Net Worth is calculated
by taking the total debt of your company and dividing it by
the net worth. Your net worth is the difference in your assets
and liabilities.
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Current Assets

$

Total Debt

$

Acid Ratio
Defined: Much like the Current Ratio, the Acid Ratio is a measurement
of liquidity. This calculation however, does not include inventory.
You want this number to be in a range of .8 to 1. If the answer
is lower than this, you may have a cashflow problem. If it
is higher than this, you may not be wisely using your assets.
The answer to this calculation is stated as a ratio (i.e.
1.01:1).

Computed: The Acid Ratio is calculated
by taking the current assets, less the inventory, and divide
that number by the current liabilities.
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Current Assets

$

Inventory

$

Current Liabilities

$

Days Sales Outstanding
Defined: This calculation deals with
your accounts receivable collections. If you offer credit terms,
you probably do so with a Net 30. This calculation tells you
how quickly people are paying. If the number you receive for
an answer is higher than 50, it is indicating you may have a
cashflow problem, but definitely you have customers who are paying
approximately 3 weeks after the due date. If your answer is in
the low 30s your collections are better, but do not take this
as an indication that you should extend credit to more people.
Accounts receivable requires cash, and if you have a choice of
spending money on inventory or accounts receivable, inventory
is often the wiser choice.

Calculated: Days Sales Outstanding is calculated
by taking your receivables and multiplying them by 365. The
answer is then divided by your net sales. The number you receive
as an answer is stated as a number of days.
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Receivables

$

Net Sales

$

Debt to Equity Ratio
Defined: Although similar to the Debt to Net Worth
calculation, we are now comparing the debt (total current
liabilities and long term debt) to the equity of the ownership
of the company.

Computed: Debt to Equity Ratio is calculated
by taking the total of the debt, and dividing it by the equity.
Equity is calculated by adding the net worth and the stockholder
(or owner) equity. The answer is stated as a ratio (i.e. 1.5:1).
For a small business, 1:1 is unrealistic, but 3:1 indicates
you owe a lot, and a bank is probably not going to look at
you favorably with regard to a loan.
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Total Debt

$

Total Equity

$

Return on Equity
Defined: Many people think this is the most important
ratio. It sure is one of the most popular. What can cause
this number to be incorrectly calculated is that it begins
with the net income.

Computed: To calculate Return on Equity ,
divide the Net Income by the Equity (Net worth plus the stockholder
or owner equity). The number you receive as an answer is an indication
of how well your invested money is working for you.
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Net Income

$

Total Equity

$

Return on Assets
Defined: This is a variety from the "Return
on Equity" calculation as this number looks at all
of your assets as compared to just your net income.

Computed: To calculate Return on Assets ,
divide the net income of your business by the Total of your
assets from your balance sheet.
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Net Income

$

Total Assets

$

Accounts Receivable
Turnover
Defined: Your terms are probably net 30 or net
10 eom. Net 30 means the bill is due within 30 days of the
date of the invoice. Net 10 EOM means the bill is due within
10 days of the end of the month. While these may be your terms,
you want to know just how quickly you are actually collecting
your money. If the answer for your business to this exercise
is 40 to 45, then you are in an acceptable range. When this
number exceeds 50, it indicates you have numerous accounts,
or sizable accounts that are slow in paying. As this number
increases, you are probably experiencing a cash crunch.

Computed: The Accounts Receivable Turnover
is calculated by taking the credit sales and dividing by the
average of your accounts receivable.
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Net Credit Sales

$

Average Account Receivables

$

Accounts Receivable
Aging
Defined: Many of the accounts receivable
packages will create this chart for you. This calculation tells
you what percentage of your accounts receivable falls into each
of the five aging groups we have created.

Computed: In our calculation of Accounts Receivable
Aging , we have created 5 aging groups; Receivables due
in less than 30 days, 30 to 60 days, 60 to 90, 90 to 120,
and over 120 days. The answer for each group is by taking
the amount of accounts receivable in that category and dividing
by the total of all accounts receivable.
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Under 30 Days Accounts
Receivable

$

30-60 Days Accounts Receivable

$

60-90 Days Accounts Receivable

$

90-120 Days Accounts
Receivable

$

120-plus Days Accounts
Receivable

$

Total Accounts Receivable

$

Under 30 Days Percentage

Under 30-60 Days Percentage

Under 60-90 Days Percentage

Under 90-120 Days Percentage

Over 120 Days Percentage

Days of Inventory
On Hand
Defined: This calculation tells you that if you were to stop ordering
merchandise, how soon would you have an empty building.
Of course, that idea is incorrect because some of the merchandise
is being reordered very frequently while other items may
be such slow sellers that you order only one per year. This
calculation gives another indication of inventory turn.
With a smaller number, it is expected that your inventory
is not very old, and that more of it is in saleable condition.
It also represents a business that is in a more liquid position.

Computed: Days of Inventory On Hand is calculated by first
dividing the cost of goods sold by 360. Then divide the current
inventory by the number you have just obtained with the first
step.
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Inventory

$

Cost of Goods Sold

$

Gross Profit Percentage
Defined: You see this calculation on every financial sheet. We
have included it so that you can understand how this most
important number is created. When you place an order for an
item, and you decide the selling price, you can easily determine
the gross profit percentage for that item. As your business
is likely to have items with very low percentage as well as
very high percentages, what you do not know is what quantity
each of the various items are being sold. The gross profit
percentage is the number that tells you what your percentage
is for all that you have sold during the last month.

Computed: Gross Profit Percentage is calculated by subtracting
the cost of goods sold from the net sales. Take the answer
from this calculation and divide it by the net sales.
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Net Sales

$

Cost of Goods Sold

$

%

Operating Expenses
as a Percentage
Defined: This calculation is another twist to your gross profit
percentage. With this calculation, we are comparing the total
of your operating expenses (where you spend money with the
exception of inventory) with the sales of your business. Of
course, the lower you can make this number, the higher your
profit will be.

Computed: Operating Expenses as a Percentage is
calculated by dividing the operating expenses by the net sales.
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Operating Expenses

$

Net Sales

$

%

Sales to Inventory
Ratio
Defined: Sales to Inventory
ratio lets you know how well your inventory is producing sales.
For the retail industry, the average ratio is 1.0 to 1.2

Computed: The
Sales to Inventory Ratio is calculated by a two step
process. The first step is to calculate the average monthly
inventory. The average monthly inventory is calculated by
taking the total of the end of the month inventory for each
of the past 12 months and divide that number by 12.
The second step is to take the net annual sales of your business
and divide that number by the average monthly inventory (shown
at cost). The answer is your sales to inventory ratio.
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Sales

$

Inventory

$

Gross Margin
Return On Inventory
Defined: The gross margin return on inventory shows the relationship
of your gross margin to the sales and inventory (at cost)
of your business. While this number varies from retail industry
to retail industry, may we suggest you use 140% as a measuring
stick.

Computed: Gross Margin Return on Inventory
is calculated by taking the gross margin, shown as a percentage
on your profit and loss statement (also known as an income
statement), and multiply it by the sales to inventory ratio.
The formula for calculating the sales to inventory ratio is
shown in the previous calculation.
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Gross
margin

%

Sales/Inventory

%

Sales
per Employee Ratio:
Defined: The sales per employee lets a business
know how well their employees produce sales for the store.

Computed: The Sales per Employee Ratio is
calculated by taking the annual net sales of your business and
divide that number by the total number of full time employees.
This number includes all employees employed by the business.
Full time employees is calculated as the total number of hours
worked in a business each week and divided by 40.
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Net Sales

$

Total Number of Full
Time Employees

Weekly Total Number of Hours

Space
Productivity:
Defined: Your business owns or rents a certain
amount of square footage. While a large portion of this
square footage is dedicated to sales, you probably have
a portion of it utilized as office and storage. This ratio
tells you how well your business is utilizing that amount
of space.

Computed: The Space Productivity is
calculated by taking the annual net sales and dividing that
number by the total square footage of the business.
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Net Sales

$

Total Square Footage

$

Personal
Productivity Ratio
Defined: Other than calculating the sales per
employee, this ratio lets you know well they are selling items
that are more profitable for your business.
Computed: The Personal Productivity Ratio
is calculated by taking the total payroll for a year and dividing
that number by the gross profit. The answer to that calculation
is then multiplied by 100.
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Total Payroll

$

Gross Profit

$

Operating Margin Per Square Foot
Defined: The title for this calculation is a bit off as it mentions margin and the computation uses gross profit. The idea of this calculation is to get a business to consider the value of each square foot within the building. Note it is total square footage; this would include any rest rooms, office, storage, basement, and lofts. For a multi-story building, you do include the square footage of each floor.

Computed: The Operating Margin Per Square Foot
is calculated by taking the Gross Profit for a year and dividing
that number by the Square Footage of a Building. The answer to that calculation
is then multiplied by 100.
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Gross Profit

$

Square Footage of Building

$

Cash to Current Liabilities Ratio
Defined: The cash to current liabilities ratio is a variation from the current ratio. The reasoning behind the cash to current liabilities ratio is that we are only measuring the cash on hand. If a business sells off inventory at a reduced price in an effort to pay bills, the business is going to struggle because the margin has not been maintained.

Computed: The cash to current liabilities ratio requires the cash on hand from the balance sheet and divide it by the total of the current liabilities which is also on the balance sheet.
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Cash

$

Current Liabilities

$

%

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