Bench Marking Your Business - CFMA
-
Upload
vineeth-gopalakrishnan -
Category
Documents
-
view
216 -
download
0
Transcript of Bench Marking Your Business - CFMA
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 1/27
Benchmarking Your Business
Presented by
Edward Lette, CPABusiness Bank of Texas, N.A.
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 2/27
Types of Benchmarking
• External Benchmarking – Comparing keyfinancial and performance indicators toother companies within your industry
• Internal Benchmarking – Comparing keyfinancial and performance indicators withinyour company, including comparisons to
history, budgets and within divisions oreven projects
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 3/27
Financial Ratio Categories
• Liquidity Ratios
• Profitability Ratios
• Leverage Ratios• Efficiency Ratios
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 4/27
Liquidity Ratios
Liquidity Ratios – used to measure thequality and adequacy of current assets tomeet current obligations as they come
due.
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 5/27
Liquidity Ratios, continued
• Current Ratio – Indicates the extent towhich current assets are available tosatisfy 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
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 6/27
Liquidity Ratios, continued
• Quick Ratio – Indicates the extent towhich the more liquid assets areavailable to satisfy current liabilities.
Usually stated in terms of absolutevalues. A quick ratio of 1.0 generally isconsidered a liquid position.
Computed as:
(Cash and cash equivalents+short term investments+net tradereceivables)/Current Liabilities
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 7/27
Liquidity Ratios, continued
• Days of Cash – Indicates the number ofdays revenue in cash. Generally 7 daysis considered adequate.
Computed as:
(Cash and cash equivalents) * 360 / Revenue
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 8/27
Liquidity Ratios, continued
• Working Capital Turnover – Indicatesthe amount of revenue being supportedby each $1 of net working capital. A
ratio exceeding 30 may indicate a needfor increased working capital tosupport future revenue growth
Computed as:
Revenue / Working Capital
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 9/27
Profitability Ratios
Used to assist in evaluating managementperformance.
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 10/27
Profitability Ratios, continued
• Return on Assets - Indicates the profitgenerated by the total assets employed. Ahigher ratio reflects a more effective
employment of company assets. Thisratio is generally presented in terms ofpercentages.
Computed as:
Net Earnings / Total Assets
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 11/27
Profitability Ratios, continued
• Return on Equity – Indicates the profitgenerated by the net assets employed.This ratio reflects the stockholders’ return
on investment as a percentage.
Computed as:
Net Earnings / Total Net Worth
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 12/27
Profitability Ratios, continued
• Times Interest Earned – Reflection of thecompany’s ability to meet interest expense
from operations. Overall indicator of
leverage balance
Computed as:
Net EBIT / Interest Expense
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 13/27
Leverage Ratios
Leverage ratios are key measurements indetermining the company’s vulnerability to
business downturns as well as the
capacity for credit and internal capitalneeds. These ratios consider variousrelationships between stockholders and
creditors, owners investment in fixedassets and others.
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 14/27
Leverage Ratios, continued
• Debt to Equity - Indicates the relationshipbetween creditors and owners. Thisrelationship varies on type of industry /
specialty.
Computed as:
Total Liabilities / Total Net Worth
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 15/27
Leverage Ratios, continued
• Revenue to Equity – Indicates the level ofrevenue being supported by each $1 ofequity.
Computed as:
Revenue / Total Net Worth
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 16/27
Leverage Ratios, continued
• Asset Turnover – Measures the level ofrevenue being supported by each $1 ofassets. This is a good measurement for
the effectiveness of asset expansion.
Computed as:
Revenue / Total Assets
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 17/27
Leverage Ratios, continued
• Fixed Asset Ratio – Measures the level ofstockholders equity invested in net fixedassets. Need to consider the effect of off-
balance sheet financing.
Computed as:
Net Fixed Assets / Total Net Worth
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 18/27
Leverage Ratios, continued
• Underbillings to Equity – Indicates thelevel of unbilled contract volume beingfinanced by the stockholders. Generally a
ratio of 30% or less is target.
Computed as:
(Unbilled Work + Costs in Excess) / Total Net Worth
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 19/27
Leverage Ratios, continued
• Backlog to Equity – Indicates therelationship of signed or committed workto total stockholders’ equity. High ratios
may indicated the need for additionalpermanent capital.
Computed as:
Backlog / Total Net Worth
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 20/27
Efficiency Ratios
Measurements of the effectiveness ofutilizing current assets and managingcurrent liabilities.
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 21/27
Efficiency Ratios, continued
• Backlog to Working Capital – Indicates therelationship between committed work andworking capital. High ratios may indicate
the need for additional permanent workingcapital.
Computed as:
Backlog / Working Capital
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 22/27
Efficiency Ratios, continued
• Months in Backlog – Measures thenumber of months needed to complete allcommitted work.
Computed as:
Backlog / (1/12 of revenue)
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 23/27
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
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 24/27
Efficiency Ratios, continued
• Operating Cycle – Indicates the length oftime for the company to complete a normaloperating 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
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 25/27
Others
• Gross Profit
• Interest as a Percentage of Gross Profit
• Coverage Ratios
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 26/27
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
8/3/2019 Bench Marking Your Business - CFMA
http://slidepdf.com/reader/full/bench-marking-your-business-cfma 27/27
Benchmarking Your Business
Questions?