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Operational ratios
This document discusses operational ratios that can help determine if a business has invested an adequate amount in current assets. It provides examples to calculate cash ratio in days of expenses, collection period of receivables in days of sales, inventory in days of sales, and payment period of payables in days of purchases. Using a commercial firm's financial statements from 2013 as an example, it shows the calculations to determine the firm has enough cash for 20 days, a collection period of 83 days, inventory for 58 days, and a payment period of 71 days.
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Operational ratios
- 1. © Instituto InternacionalSan Telmo, 2012 OPERATIONAL RATIOS
- 2. OPERATIONAL RATIOS How canwe know if the amount of money invested is adequate for the business? We will leave aside investments in fixed assets, which exceed the scope of this block. Let’s focus on investments in current assets. Looking only at the figure of dollars invested in customer receivables, or in inventories, it is not easy to make any judgement about the necessity of its necessity or efficiency . So it is useful to transform figures in dollars into operational ratios, normally days, since this can help us form an opinion on the efficiency of management. Let’s examine the following items on the BS: • • • • Inventory (or Stock) Account Receivables Cash Account Payables Cash: days of expenses Account receivables: collection period Stocks: days of inventory Account payables: payment period
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- 4. Cash Inventory (or Stock) Account Receivables Cash Account Payables Note: We areassuming that year end statements are being used, so any figure in the P&L refers to a complete year. If we use quarterly statements, we must divide by 90, and by 30 if monthly statements are used. If the firm is seasonal, attention must be paid to the date when the statements are formulated. It is recommended to use quarterly or monthly P&L data to compute all the operational ratios in seasonal firms.
- 5. Example - CASH Hereare the financial statements of a commercial firm for the year 2013 B.S. items 31/12/2012 31/12/2013 Cash 65 85 Receivables 320 420 Inventory 183 210 Payables 260 256 P&L Sales -Cost of goods sold Year 2013 1,854 1,315 Gross margin 539 - Operating Expenses 215 EBITDA 324
- 6. Example Here are thefinancial statements of a commercial firm for the year 2013 B.S. items 31/12/2012 31/12/2013 Cash 65 85 Receivables 320 420 Inventory 183 210 Payables 260 256 P&L Sales -Cost of goods sold Year 2013 1,854 1,315 Gross margin 539 - Operating Expenses 215 EBITDA 324 We have cash enough to pay for 20 days of expenses.
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- 8. Example- Receivables Here arethe financial statements of a commercial firm for the year 2013 B.S. items 31/12/2012 31/12/2013 Cash 65 85 Receivables 320 420 Inventory 183 210 Payables 260 256 P&L Sales -Cost of goods sold Year 2013 1,854 1,315 Gross margin 539 - Operating Expenses 215 EBITDA 324
- 9. Example - RECEIVABLES Hereare the financial statements of a commercial firm for the year 2013 B.S. items 31/12/2012 31/12/2013 65 85 We have enough cash to pay for 20 days of expenses. Receivables 320 420 Our collection period is 83 days of sales. Inventory 183 210 Payables 260 256 Cash P&L Sales -Cost of goods sold Year 2013 1,854 1,315 Gross margin 539 - Operating Expenses 215 EBITDA 324
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- 11. Example - Inventory Hereare the financial statements of a commercial firm for the year 2013 B.S. items 31/12/2012 31/12/2013 Cash 65 85 Receivables 320 420 Inventory 183 210 Payables 260 256 P&L Sales -Cost of goods sold Year 2013 1,854 1,315 Gross margin 539 - Operating Expenses 215 EBITDA 324
- 12. Example - RECEIVABLES Hereare the financial statements of a commercial firm for the year 2013 B.S. items 31/12/2012 31/12/2013 65 85 We have enough cash to pay for 20 days of expenses. Receivables 320 420 Our collection period is 83 days of sales. Inventory 183 210 We have stock in our warehouses for 58 days of sales. Payables 260 256 Cash P&L Sales -Cost of goods sold Year 2013 1,854 1,315 Gross margin 539 - Operating Expenses 215 EBITDA 324
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- 14. Example - PAYABLES Hereare the financial statements of a commercial firm for the year 2013 B.S. items 31/12/2012 31/12/2013 Cash 65 85 Receivables 320 420 Inventory 183 210 Payables 260 256 P&L Sales -Cost of goods sold Year 2013 1,854 1,315 Gross margin 539 - Operating Expenses 215 EBITDA 324
- 15. Example - PAYABLES Hereare the financial statements of a commercial firm for the year 2013 B.S. items 31/12/2012 31/12/2013 65 85 We have enough cash to pay for 20 days of expenses. Receivables 320 420 Our collection period is 83 days of sales. Inventory 183 210 We have stock in our warehouses for 58 days of sales. Payables 260 256 Our payment period is 71 days of purchases. Cash P&L Sales -Cost of goods sold Year 2013 1,854 1,315 Gross margin 539 - Operating Expenses 215 EBITDA 324
- 16. © Instituto InternacionalSan Telmo, 2012