Understand Business Financial Ratios

Financial ratios provide a useful way to pinpoint strengths and weaknesses in the performance and solvency of your business. Here are four types of ratios that you can monitor using the figures from your balance sheet.

Liquidity ratios, such as the current ratio, measure the ability to pay bills over the next 12 months. You compute the current ratio by dividing current assets (cash, receivables, inventory, and other assets expected to be converted to cash within a year) by current liabilities (financial obligations expected to be settled within a year). A current ratio greater than one is generally considered healthy.

 

 Asset turnover ratios indicate how efficiently your business is using assets. For instance, receivables turnover (annual credit sales divided by accounts receivable) reveals how quickly your business collects accounts receivable. Inventory turnover (cost of goods sold divided by average inventory level within a given time period) tells you how often your inventory is moving

 

Financial leverage ratios

address your company’s long-term solvency. An example is the debt ratio, which is total liabilities divided by total assets. A debt ratio greater than one may be reason for concern.

 

Profitability ratios measure your business’s success at generating profits. One profitability margin you may be familiar with is the profit margin. You calculate your profit margin by dividing net income by sales. Here’s an illustration: Say your net income is $30,000 and sales are $150,000. Your net profit margin is 20%

($30,000/$150,000).

 

How do you know if a financial ratio is good or bad? One way is to compare the ratio to the same ratios from previous periods. You can also use comparisons to similar companies or to your business forecasts.

 

Contact us for more details about how ratios can help you assess the health of your business.

 

For more information, call us at (219) 769-3616 with your questions, or email them to rzondor@swartzretson.

com.

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July 24, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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July 24, 2015

Know the Tax Rules for Summer Travel

Are you traveling for business this summer? If you’re planning to take a tax deduction for your expenses, the rules may be more complicated than you think. Here’s a refresher.

The general rule. “Travel” expenses are ordinary and necessary costs incurred while away from your normal working area. “Away” means you’re away from your tax home overnight and you need to sleep or rest so you can complete your work.

Domestic travel. For domestic travel that’s entirely business related you can fully deduct expenses such as airfare, hotel, rental car, and gratuities. Your meals are 50% deductible.

What if you incur incidental personal expenses, such as a side trip to visit family or an amusement park, on a trip made primarily for business? The expenses related to your personal activities are not deductible.

If your travel is primarily personal, such as a vacation, your expenses generally cannot be deducted at all. However, you may be able to claim some deductions if, for example, you call on a client while on vacation. You can deduct the cost of the client visit, but not the travel or hotel costs of getting from your tax home to the client’s location.

Foreign travel. If you travel outside the U.S. and spend the entire time on business activities, your expenses are deductible. If you combine business and personal activities on an international trip, you must typically allocate your time between those activities. You can only deduct the business portion of getting to and from your destination. Total deductions are generally limited to the business percentage (business days divided by total days).

When your trip is partly domestic and partly international, use the domestic guidelines for the domestic portion and the international guidelines for the international portion.

As you make your summer travel plans, give us a call. We can help you navigate the rules.

 

For more information, call us at (219) 769-3616 with your questions, or email them to tlynch@swartz-retson.com