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    Bench Marking Your Business - CFMA

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    Vineeth Gopalakrishnan
    This document discusses benchmarking a business by comparing key financial and performance indicators both externally to other companies in the same industry and internally over time. It outlines various types of ratios that can be used for benchmarking, including liquidity ratios to measure ability to meet current obligations, profitability ratios to evaluate management performance, leverage ratios to assess vulnerability to downturns, and efficiency ratios to measure utilization of assets and liabilities. Examples are provided of specific ratios under each category like current ratio, return on assets, debt to equity, days in accounts receivable, and operating cycle. The document stresses understanding limitations of comparisons and importance of also looking at historical trends for the business.

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    Bench Marking Your Business - CFMA

    Uploaded by

    Vineeth Gopalakrishnan
    35 views27 pages
    This document discusses benchmarking a business by comparing key financial and performance indicators both externally to other companies in the same industry and internally over time. It outlines various types of ratios that can be used for benchmarking, including liquidity ratios to measure ability to meet current obligations, profitability ratios to evaluate management performance, leverage ratios to assess vulnerability to downturns, and efficiency ratios to measure utilization of assets and liabilities. Examples are provided of specific ratios under each category like current ratio, return on assets, debt to equity, days in accounts receivable, and operating cycle. The document stresses understanding limitations of comparisons and importance of also looking at historical trends for the business.

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    This document discusses benchmarking a business by comparing key financial and performance indicators both externally to other companies in the same industry and internally over time. It outlines various types of ratios that can be used for benchmarking, including liquidity ratios to measure ability to meet current obligations, profitability ratios to evaluate management performance, leverage ratios to assess vulnerability to downturns, and efficiency ratios to measure utilization of assets and liabilities. Examples are provided of specific ratios under each category like current ratio, return on assets, debt to equity, days in accounts receivable, and operating cycle. The document stresses understanding limitations of comparisons and importance of also looking at historical trends for the business.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    35 views27 pages

    Bench Marking Your Business - CFMA

    Uploaded by

    Vineeth Gopalakrishnan
    This document discusses benchmarking a business by comparing key financial and performance indicators both externally to other companies in the same industry and internally over time. It outlines various types of ratios that can be used for benchmarking, including liquidity ratios to measure ability to meet current obligations, profitability ratios to evaluate management performance, leverage ratios to assess vulnerability to downturns, and efficiency ratios to measure utilization of assets and liabilities. Examples are provided of specific ratios under each category like current ratio, return on assets, debt to equity, days in accounts receivable, and operating cycle. The document stresses understanding limitations of comparisons and importance of also looking at historical trends for the business.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 27

    Benchmarking Your Business

    Presented by Edward Lette, CPA Business Bank of Texas, N.A.

    Types of Benchmarking
    External Benchmarking Comparing key financial and performance indicators to other companies within your industry Internal Benchmarking Comparing key financial and performance indicators within your company, including comparisons to history, budgets and within divisions or even projects

    Financial Ratio Categories


    Liquidity Ratios Profitability Ratios Leverage Ratios Efficiency Ratios

    Liquidity Ratios
    Liquidity Ratios used to measure the quality and adequacy of current assets to meet current obligations as they come due.

    Liquidity Ratios, continued


    Current Ratio Indicates the extent to which current assets are available to satisfy current liabilities. Usually stated in terms of absolute values (i.e., 2.5 to 1.0 or simply 2.5).

    Computed as: Current Assets / Current Liabilities

    Liquidity Ratios, continued


    Quick Ratio Indicates the extent to which the more liquid assets are available to satisfy current liabilities. Usually stated in terms of absolute values. A quick ratio of 1.0 generally is considered a liquid position.
    Computed as: (Cash and cash equivalents+short term investments+net trade receivables)/Current Liabilities

    Liquidity Ratios, continued


    Days of Cash Indicates the number of days revenue in cash. Generally 7 days is considered adequate.
    Computed as: (Cash and cash equivalents) * 360 / Revenue

    Liquidity Ratios, continued


    Working Capital Turnover Indicates the amount of revenue being supported by each $1 of net working capital. A ratio exceeding 30 may indicate a need for increased working capital to support future revenue growth
    Computed as: Revenue / Working Capital

    Profitability Ratios
    Used to assist in evaluating management performance.

    Profitability Ratios, continued


    Return on Assets - Indicates the profit generated by the total assets employed. A higher ratio reflects a more effective employment of company assets. This ratio is generally presented in terms of percentages.
    Computed as: Net Earnings / Total Assets

    Profitability Ratios, continued


    Return on Equity Indicates the profit generated by the net assets employed. This ratio reflects the stockholders return on investment as a percentage.
    Computed as: Net Earnings / Total Net Worth

    Profitability Ratios, continued


    Times Interest Earned Reflection of the companys ability to meet interest expense from operations. Overall indicator of leverage balance
    Computed as: Net EBIT / Interest Expense

    Leverage Ratios
    Leverage ratios are key measurements in determining the companys vulnerability to business downturns as well as the capacity for credit and internal capital needs. These ratios consider various relationships between stockholders and creditors, owners investment in fixed assets and others.

    Leverage Ratios, continued


    Debt to Equity - Indicates the relationship between creditors and owners. This relationship varies on type of industry / specialty.
    Computed as: Total Liabilities / Total Net Worth

    Leverage Ratios, continued


    Revenue to Equity Indicates the level of revenue being supported by each $1 of equity.
    Computed as: Revenue / Total Net Worth

    Leverage Ratios, continued


    Asset Turnover Measures the level of revenue being supported by each $1 of assets. This is a good measurement for the effectiveness of asset expansion.
    Computed as: Revenue / Total Assets

    Leverage Ratios, continued


    Fixed Asset Ratio Measures the level of stockholders equity invested in net fixed assets. Need to consider the effect of offbalance sheet financing.
    Computed as: Net Fixed Assets / Total Net Worth

    Leverage Ratios, continued


    Underbillings to Equity Indicates the level of unbilled contract volume being financed by the stockholders. Generally a ratio of 30% or less is target.
    Computed as: (Unbilled Work + Costs in Excess) / Total Net Worth

    Leverage Ratios, continued


    Backlog to Equity Indicates the relationship of signed or committed work to total stockholders equity. High ratios may indicated the need for additional permanent capital.
    Computed as: Backlog / Total Net Worth

    Efficiency Ratios
    Measurements of the effectiveness of utilizing current assets and managing current liabilities.

    Efficiency Ratios, continued


    Backlog to Working Capital Indicates the relationship between committed work and working capital. High ratios may indicate the need for additional permanent working capital.
    Computed as: Backlog / Working Capital

    Efficiency Ratios, continued


    Months in Backlog Measures the number of months needed to complete all committed work.
    Computed as: Backlog / (1/12 of revenue)

    Efficiency Ratios, continued


    Days in a/r Days in a/p Days in inventory All indicate the number of days to liquidate.
    Computed as: ((Net a/r - Retainage) * 360) / Revenue (Accounts Payable Retainate) * 360 / Total cost Inventory * 360 / Cost of Sales

    Efficiency Ratios, continued


    Operating Cycle Indicates the length of time for the company to complete a normal operating cycle. A low ratio may indicate a need for more working capital.
    Computed as: Days in Cash + Days in A/R + Days in Inventory Days in A/P

    Others
    Gross Profit Interest as a Percentage of Gross Profit Coverage Ratios

    Now What?
    Understand the limitations of industry comparisons Understand the importance of historical comparisons Build a list of key performance indicators for your company and build goals around improvement Work with your users to determine what is important to them

    Benchmarking Your Business

    Questions?

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