Financial ratios draw on figures from your business’ Balance Sheet and Profit and Loss Statement to produce an idea of how your business is performing.
The ratios should be viewed in the context of your business strategy as well as the timeframe of the figures that were used, which is usually the past financial year.
When calculating your financial ratios, make sure to use your latest and audited Balance Sheet and Profit and Loss Sheet. Otherwise, needless to say, the results will be inaccurate as it may have some costs or grants that have not been accounted for.
Here are the key financial ratios that can assist you in evaluating your business performance.
Disability revenue concentration ratio
* The disability revenue sources should include all current NDIS support and revenue sources
This ratio shows the extent of the potential impact that the NDIS could have on your business.
A higher percentage means a greater degree of potential impact.
Typically, a wider range of revenue sources are desirable for businesses as it prevents them from being too reliant on a single source. However, this would depend on your own business strategy.
If having one revenue source makes the most sense for your business, any risks that may arise in obtaining the revenue should be identified and managed as much as possible.
Months of spending ratio
This ratio shows the number of months of cash currently available to cover expenditure. This indicates the ability of your business to transition from payments in advance to payments in arrears.
Generally, 3 months or more is preferred.
Current ratio (or liquidity ratio)
* Current liabilities should include unexpended funds
This ratio shows the ability of your business to meet financial commitments over the next financial year.
A ratio below 1.5 is concerning and means that your business operations should be monitored. If you obtain a ratio below 1, you should seek accounting and legal advice as you may be trading while insolvent.
However, a very high current ratio may indicate a potential to use cash funds because you might have more cash sitting idly in operating accounts than needed. It might also mean that your business is taking a conservative approach to its finances and investment.
Debt to total assets ratio
This ratio shows how much your assets are funded by debt.
A good result would be as close to 0 as possible. A higher ratio usually shows that the business is unable to service its total debts.
This ratio shows the rate at which your business grows its reserves from revenue. These reserves are typically used for working capital or investment in future revenue-generating activities.
The preferred result should be a positive figure. A business that continuously has negative returns is unlikely to be sustainable.
Return on assets ratio
This ratio shows the effectiveness of a business in managing its assets to generate profit, which indicates its efficiency.
A good result would be greater than the annual rate of inflation.
If you would like to know more about financial strategies for your not-for-profit or disability services organisation, have a look at the National Disability Services’ fact sheet.
If you need any assistance with understanding the ratios, feel free to contact us on our website.