Business monitoring indicators

Liquidity levels should be monitored continually. This provides an indicator for determining the solvency of the company.

Liquidity verification

Constant liquidity monitoring is of vital importance. First degree liquidity indicates the current solvency level and should correspond to at least 20% of short-term debt; otherwise there could be a risk of insolvency (see calculation formula).

 

 

Immediately available resources + unused credit x 100

 

1st degree liquidity

=

----------------------------------------------------

= ?%

 

 

Short-term liabilities

 

2nd degree liquidity compares immediately available resources and short-term receivables with short-term business commitments. This value should exceed 100%.

    Immediately available resources + receivables + unused credit x 100  
2nd degree liquidity = ---------------------------------------------------- = ?%
   

Short-term liabilities

 

However, these indexes only give a limited indication of the level of medium-term liquidity. The actual situation in terms of short-term solvency is unclear because short-term income and expenses are not visible. This can only be clarified if the liquidity plan is readjusted (every month or ideally every week).

Debtor verification

Liquidity depends on the speed at which an invoice is established upon completion of the work and the punctuality of customer payments. The average payment practices of the customer depend on the receivables turnover and their payment terms.

The receivables turnover indicates how frequently debtors’ active debts appear in the total turnover. Therefore, the higher the total turnover, the better the situation.

 

 

Sales volume

 

Receivables turnover

=

------------------------

= ? x

 

 

Debt items

 

The debtors’ payment term is the average duration between the invoicing date and the receipt of payment.

 

 

360 (days per year)

 

Debtors’ payment term

=

---------------------------------

= ? days

 

 

Receivables turnover

 

In this case, the receivables turnover should not fall below a factor of between 8 and 10 which, for a debtors’ payment term of 30 days, would correspond in reality to a period of 36 to 45 days.

Storage indicators

The shorter the average storage period, the lower the “total capital”. It is preferable for the storage period to be as short as possible. At the same time, it is necessary to guarantee rapid deliveries. To achieve this, the warehouse accounting system must indicate the level of the inventory turnover rate and the average storage period.

The inventory turnover rate shows, by analogy with the receivables turnover, the average inventory turnover level. The higher the turnover, the better the situation.

 

 

Purchase price of goods

 

Inventory turnover rate

=

--------------------------------------------

= ? x

 

 

Price of inventories of goods

 

The storage period indicates how long on average goods have remained in the warehouse. Once again, the shorter the period, the better the situation.

 

 

360 (days per year)

 

Average storage period

=

-------------------------------------

= ? days

 

 

Inventory turnover rate

 

Calculation of actual relocation costs

The CDF digital tool (Cost Differential Frontier calculator) evaluates the actual costs associated with extending a company’s production chain. It allows small, medium-sized and large enterprises in Switzerland to bring to light the hidden expenses incurred in relocation.

The Cost Differential Frontier calculator reveals that the savings anticipated within the context of relocation do not always reflect the actual situation. Production expenses may, admittedly, be higher abroad but at the same time, delivery periods may be longer, often involving large order volumes. The costs linked to potential inventory shortages (or surpluses) may also increase as companies are more exposed to fluctuations in demand in this context.

The CDF, which was designed by OpLab, a laboratory within Lausanne University, may be obtained free of charge online. A presentation video in English may be accessed here together with the direct link to the tool.

Profitability indicators

A company’s profitability is what determines the short and long-term result. This corresponds to the ratio between the result obtained (i.e. the surplus turnover compared with expenses) and the invested capital. 
Total profitability reveals the ratio between the result and all of the invested equity and liabilities. It is calculated as follows:

 

 

Company profit

 

Return on capital employed

=

-------------------------------------

= ?%

 

 

Average global capital

 

The global capital corresponds to the average balance sheet amounts and the latent reserves at the beginning and end of the period concerned.

  • If the return on assets is higher than the interest on loan capital, then the return is higher than the interest payable by the company for the loan capital. In other words, the company is running smoothly.
  • Given that the total capital is used for the deduction, the indicator is much more relevant than when only equity is taken into consideration. If equity is very low and liabilities are particularly high, the return on equity will be very high. Investors will no doubt be pleased, but the company could disappear if the liabilities can no longer be remunerated or reimbursed.

The operating profitability is more informative, however. It indicates the relationship that often exists between the operating profit and the invested net current assets:

 

 

Operating profit x 100

 

Operating profitability

=

---------------------------------------

= ?%

 

 

Average net current assets

 

Net current assets (only the necessary capital) are made up of the average balance sheet amounts and latent reserves after deducting non-operating assets at the beginning and end of the period in question.

The operating profit is obtained by deducting neutral income and expenses (e.g. interest) and adding or removing variations in latent reserves.

The operating return is espeically of interest in comparisons over several years: if it decreases, this may be an initial indicator of a crisis.


Informations

Last modification 27.09.2019

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