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Hauliers'
Page 42
Page 43
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You might think that managing a haulage company is an intuitive seat-of-the-pants affair, but ther some firm mat ematical concep all businesses %:.d be aware of.
ahem Cawley Without a doubt, successful road transport businesses are made by good management, which, in turn, reflects skill factors relating to marketing and selling, purchasing and production, customer relations and financial control.
Many such skills are acquired from experience, while business perception is a proven quality of a successful manager. But good management also relies on information. Owners and managers must be kept informed, which is where ratios can be of great assistance particularly in financial control.
Be warned, however, ratios are not a substitute for sound management. Remember the caveat: "figures can be used to prove anything". Caution needs to be exercised, while still appreciating that ratios can certainly help and inform.
In addition, ratios can also provide information on valuable trends possibly the most important aspect of management information.
With these factors in mind, use these 10 specific ratios to help provide a key in the pursuit of a profitable business, whether operated by a limited company, partnership or sole trader.
Gross profit margin This is the key ratio for most businesses. It measures performance and efficiency at the prime level of operations. It is arrived at by deducting the cost of sales (stock and labour) from sales and then expressing the result as a percentage of sales.
Improvement can be achieved either by increasing sales or by reducing costs or by doing both.
Comparing the gross profit margin over a number of years can also prove to be extremely revealing.
Turnover does not mean everything. Any benefit from higher sales can soon be eliminated if the best prices are not negotiated for stock, or if poor care is taken over waste. Similarly, high wage rates or little control of overtime can easily offset the efforts of the person selling.
Operating (or trading) profit margin This is clearly another significant ratio that must also be carefully monitored, It reflects the expenses incurred in running a business, but before interest charges, drawings and exceptional items are taken into account.
Many companies are managing to stay afloat in the current recession because they have pruned expenses to the core. Certain expenditure is fixed, such as rent and rates, but wasteful use of power, telephone and promotional material should be eliminated to improve operating profit.
Pre-tax profit margin
This represents the profit bottom line before tax. It is the measure of profit earned on sales, after deducting such things as finance charges and bonuses.
Finance charges can be criticallf a business is undercapitalised, significant borrowing might be required. Once taken on, such debts, with all the interest charges involved, can influence profit enormously Many perfectly viable enterprises that were set up, say.10 or so years ago have subsequently found themselves in difficulty following swingeing increases in bank base rates.
The current ratio
This ratio provides an indication of a business's ability to pay its way. This means using current assets to meet day-to-day expenditure, without having to sell fixed 1 assets or raise long-term finance. This particular ratio must be viewed with care. Although current liabilities should almost invariably, be treated as short-term commitments, such "shorttermism" may not always apply to current assets. For instance, creditors expect to be paid on time. while bank overdrafts are technically repayable on demand. Current assets may include items that could have little actual value, while stock may not be able to be turned easily into cash. This is why the current ratio should be viewed alongside that of the following acid test.
The acid test ratio
This particular ratio is all about a business's liquidity. Most liabilities are settled by cash in hand and from debtors. This means that a business with a high proportion of its current assets tied up in stock could be vulnerable to pressing creditors.
In assessing this ratio, the underlying quality of debtors will certainly be significant as will be their ability to pay on time.
Stock turn
This ratio indicates the speed by which a business turns over its stock.The faster the better is the general rule, provided that stocks are not kept too low to the detriment of customers.
Accuracy in assessing the end-of-year stock level is important, and it should be representative of the average position for the year as a whole.
Credit given
This reflects debtor control, something that must be given priority. Until debtors are turned into cash, creditors may have to go wanting. Again, the trend of this ratio may prove revealing.
Credit taken
Generally speaking, the more credit that can be taken, the better, provided it is within the terms of trade. Deliberately withholding payments to suppliers may rebound should future supplies become scarce. A good reputation for prompt payment should certainly help at such times, and such a policy ought to be a prime objective of any business.
Debt: equity ratio
This ratio reveals a business's gearing, that is, the amount that has been borrowed in relation to a proprietor's funds. Proprietor's funds are the net worth of a business, being the difference between total assets and total liabilities. A highly-geared business is one where the proportion of borrowed money is high, and it is normally preferable for this to be as low geared as possible. Bankers, for instance, would not wish to see this ratio at any more than 1:1.
Return on capital employed
This ratio measures a business's profit against the resources under its control. If the outcome is to be meaningful, accuracy is essential, such as with the valuations of fixed assets and stock.
Any owner, or investor, wants to know what return has been achieved on their investment. This ratio provides an overall view of the strength of a business.