RUNNING a business should never become a guessing game. That’s why getting an accurate picture of what’s going on in your business is important if you want to run a tight ship, grow your operations and ultimately make a profit.

One of the best ways to do this is through understanding and using business calculations. Below are five of the most useful ones


1. Breakeven analysis

A business’s breakeven point is where the total cost of running the business is equal to the turnover. This is important because it tells you what the minimum turnover is that you need in your business, in order to keep afloat.

The breakeven analysis is usually calculated on an annual basis when you are doing your budgeting.

Breakeven analysis = Operating expenses ÷ Average Gross Profit % *

Gross profit % = gross profit ÷ sales X 100


2. Working capital ratios

These ratios are also known as liquidity ratios and indicates a business’s ability to meet its obligations. This needs to be controlled as it is the total amount of money that is in daily use in the business.

Working capital ratio = current assets* ÷ current liabilities*

*Current assets = short term debtors, money in the bank, petty cash etc

*Current liabilities = creditors, bank overdrafts etc.


3. Average gross profit percentage per department

When it comes to running a business, it is important to work out which sections of your business are making a profit and which aren’t.

In this way, you can plan better. Offering discounts on those products that aren’t selling well, buying more stock or by moving more stock out into certain places on the shop floor, are some of the strategies you can use to sell more stock.

The below equation is for working out gross profit in a retail business. Gross profit is sales minus direct salaries, or minus direct cost related to service. For example, if you are running a hospital the food you offer patients would be refered to as a direct cost.

Gross profit = sales – cost of sales*

*Cost of sales = opening stock + (gross puchases – returns out – discount received) + transport cost – closing stock


4. Stock turnover rate

It’s important to know, as precisely as possible, how many times a year you need to buy stock. If you don’t purchase stock often enough you won’t have anything to sell.

But worse still, is if you buy new stock too often. You could end up with goods that aren’t sold or, in the case of perishable goods such as groceries, that go bad. It could put a strain on cashflow and ruin your business.

Stock turnover rate per year = cost of sales ÷ average stock*

*Cost of sales = budgeted turnover - gross profit

*Average stock = opening + closing stock ÷ 2


5. Debtors trading cycle

When you are selling goods on credit it is important to ensure that you don’t get into a situation where you have more money owing to you than you have in the business.

One way to stay on top of this is to collect money owed to you faster than you give out credit. The debtors trading cycle tells you how long, on average, it takes debtors to pay for goods they purchased. It shows the effectiveness of credit control in your business.

Debtors trading cycle = 365 days ÷ debtor turnover rate*

*Debtor turnover rate = sales ÷ average debtors