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10 Formulas Every Business Owner Should Know

    1. Inventory Turnover = Cost of Goods Sold/Average Inventory

    Indicates the amount of money tied up in inventory, and thus inventory management effectiveness. The higher the turnover ratio, the better.

    2. Receivables Turnover = Revenue/ Average Receivables

    A high receivables turnover could mean either that collection is efficient, or that credit policies are too stringent.

    3. Payables Turnover = Purchases/ Average Trade Payables

    Cost of Goods Sold is often used as an approximation of purchases

    4. Current Ratio = Current Assets/Current Liabilities

    "Current Assets" means assets expected to be consumed or converted to cash within one year. A lower ratio means greater reliance on operating cash flow and financing to meet short term obligations.

    5. Quick Ratio = Cash + Short Term Marketable Investments + Receivables/Current Liabilities

    Includes only the more liquid "current" assets. This ratio is more conservative than the current ratio.

    6. Cash conversion cycle = Days on hand + Days sales outstanding - # Days payable

    The amount of time between the company investing in working capital, and collecting cash. A short cash-conversion cycle indicates greater liquidity.

    7. Debt to Assets Ratio = Total Debt/Total Assets

    The percentage of total assets financed by debt. Higher debt means higher financial risk and weaker solvency.

    8. Debt to Equity Ratio = Total Debt/Total Shareholder's Equity

    The amount of debt capital relative to equity capital. A ratio of 1 indicates equal amounts of debt and equity.

    9. Gross Profit Margin = Gross Profit/Revenue

    A high gross profit margin is the result of low materials cost and/or high product pricing.

    10. Operating Profit Margin = Operating Income/Revenue

    Changes in this ratio can reflect improvements or deterioration in operating costs, such as overhead.
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