In business, there are a number of indicators that tell you you’re doing well.
It could be that sales are up week on week or you just have a gut feeling that things are going in the right direction.
The numbers in Saasu are a great way to understand how healthy your business is, and, just like your own health, you should be doing regular check ups of your business health.
So here are two quick health checks you can make, what they mean and how to improve them.
Inventory Turnover
Inventory turnover = Cost of goods sold/Inventory
The inventory turnover rate is the number of times you turnover your inventory per period. For example, if my cost of goods for the year was $1000 and my current inventory value is $200, I’ve turned over my inventory five times in that year (this can be done over any period; it’s also more reliable to take an average inventory figure from the period).
Why is this number important?
Inventory turnover is a key metric for any business that keeps inventory on hand. It tells you how quickly you’re selling your inventory and subsequently how healthy your cashflow is.
As a general rule, the higher the number is, the better – keeping in mind this is subjective; a company selling newspapers is going to have a lot higher turnover rate than a construction company. The longer stock spends sitting in your store or warehouse, the more cashflow it eats up that could be used elsewhere.
Where do I find this information in Saasu?
You can find the cost of goods on your Profit or Loss report (Reports > Profit or Loss Summary) and your Inventory figure is on your Balance Sheet (Reports > Balance Sheet). Make sure the dates for these reports cover the same time spans.
How do I improve it?
A good way to improve this is to identify inventory items that aren’t selling as fast as the rest of your items, using Item History Reports. The longer you hold an item, the more you could do with the money that’s tied up in it, so more return should be expected when it is sold.
If this is not the case, you should look at how you can make the item sell faster. This may be a cheaper price, better advertising or simply not stocking the item anymore.
Working Capital Ratio
Ratio of Current Assets : Current Liabilities
For example:
Current Assets = $250,000
Current Liabilities = $100,000
Working Capital Ratio = 2.5 : 1
This ratio, along with the related measure of simply working capital (current assets – current liabilities), is a measure of a company’s ability to pay its short term debts. It can be useful for a company to understand health, short term liquidity and capacity to take on further debt.
Why is this number important?
The working capital ratio is very important to understand how well equipped your company is to pay off short term debt. For example, is the money to be received from Accounts Receivable expected to be enough to cover Accounts Payable?
Creditors or lenders may also be interested in this before giving you a line of credit or loaning money to understand the risk involved.
Where do I find this information in Saasu?
Both the Current Assets and Current Liabilities figures can be found on your Balance Sheet Report (Reports > Balance Sheet).
How do I improve it?
This number is subjective in that it will depend heavily on your industry. A ratio of 2 : 1 is sometimes seen as desirable although it’s subjective for each industry. Improvements can be made by shortening the time it takes to be paid by using tools such as Online Invoicing, negotiating longer terms with suppliers or keeping minimal stock on hand by using Stock Alerts and Minimum Reorder Quantities in Saasu.
Just a quick note to say that Scott’s post is not to be taken as financial advice. They’re simply insights drawn from his experience as an Associate CPA. If you need financial advice for your business, please contact a professional.
New to Saasu? Learn more here.
- The Art Of Less In Business - 15 December 2016
- Cloud + ECommerce + Saasu = Australian Manufacturer’s Success - 17 August 2016
- 2 business metrics you should know now - 15 June 2016
