The New Year brings a flurry of preparing financial statements and crunching financial ratios in an effort to get under the tax man’s bar or jump over the lender’s covenants. Shareholders and the Board of Directors are also anxiously pacing the floors waiting to put their stamp of approval on your efforts. Here are two most frequently asked questions from grain elevators of the 2014 season and the financial ratios that enlighten us with the answers to these questions.
This percentage represents the total gross profit dollars needed to cover salaries. Total gross profits equal to product sales, less related cost of goods sold, plus any service income. If your ratio is 28% it means that you paid 28 cents in labor for every 1$ in gross income.
This ratio will tell you how much gross operating income to expect from each dollar in sales. A ratio of 9% translates into a gross operating income of 9 cents of each dollar in sales. Keep in mind that this ratio is dramatically affected by the commodity prices.
Just like any test the individual ratios are only part of the answer. A financial trend analysis from the CFO or accounting team will put together all of this year’s financial ratios and compare them to the previous 5 years to determine how much you have improved from last year or the 5 year average.
The peer group financial analysis is a comparison of your company verses a sampling of other companies that compete against you. The ability to see how you rate amongst your peers and compare your company to the industry banking standards will help you continue to focus your energies in the appropriate parts of your business, and help to attract capital when the market calls for it.
Grain companies have always been ranked among their peer group on three main factors: liquidity, solvency and profitability. The New Year is the perfect time to start using your financial ratios as your newest management tool.
For more information on this topic and many more related topics, please click below for info on our Grain Elevator Financing Course:
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