Wednesday, 19 Oct 2022
A Melbourne-based business is considered healthy when it can pay its bills on time and makes profits year after year. However, this is a superficial view of the stability of the organisation. Business owners, stakeholders and investors are interested in an in-depth analysis of the financial health of the company. It cannot be determined unless they assess the financial statements and evaluate financial ratios.
Thus, professional bookkeeper Melbourne are assigned with the task of making the calculations to check the performance of the business. They use different metrics simultaneously to establish the financial well-being of an entity and its future viability. Here are the measures they adopt to check the growth and sustainability of a company in Melbourne.
Calculating the profitability ratios is the best way to measure the financial health of a business in Melbourne. Bookkeepers use this metric to assess the progress of the company over the years and how it fares against its competitors. It is the most significant measure because it defines the bottom line of the entity, which must be positive to sustain the business in the long run.
A company can survive short periods of losses, but a negative bottom line indicates an impending failure. Thus, the profit margin gives a clear picture of the financial standing. To determine the profitability ratios, the bookkeeper in Melbourne calculates the gross profit (net sales – cost of goods sold), operating profit (gross profit – operating costs that include administrative and selling expenses) and net profit [(operating profit + other income) – additional expenses – income tax].
The profit margin ratios are as follows:
These ratios provide a real assessment of the growth of the business as compared to checking the monthly profits from the financial statements. They are also helpful in calculating the return on investment by dividing net profit before taxes by net worth.
The liquidity ratios help to understand whether the company can meet its short-term debt obligations or not. It ascertains how quickly the assets can be converted into cash to cover the liabilities. Bookkeepers track this metric to check if the Melbourne-based business is stable in a given period because short-term stability implies long-term sustainability.
The liquidity ratios include calculating the following:
The current ratio is also known as the working capital ratio and determines the ability of the company to meet its short-term obligations. The quick ratio is the acid test that evaluates the ability of the business to pay its bills using its assets that can be quickly converted to cash. The cash ratio is useful for investors who wish to invest in a business in Melbourne.
While liquidity determines the short-term obligation fulfilment ability of a company, solvency assesses the same thing for the long-term. Thus, it is often used to check the financial health of the business. Bookkeepers calculate the metric using the formula:
Debt to Equity Ratio = Total Liabilities / Total Shareholder’s Equity
Here, shareholder’s equity is the amount that will be returned to the shareholders in case the business is liquidated, and all its debts are paid off.
Operating efficiency is used by bookkeeping companies in Melbourne to understand the efficiency of any business activity. It determines the cost of completing a financial task. If the cost is high, the task is considered inefficient, and if the cost is low, it is highly efficient.
The operating margin helps to identify the efficiency of the business. It takes into account the operating profit margin after subtracting the variable costs of manufacturing and promoting products or services. The formula is as follows:
Operating Margin = Operating Earnings / Revenue
The operating earnings are calculated by subtracting the cost of goods sold from revenue. The operating margin formula is utilised by the bookkeepers to compare the performance of the company with other similar Melbourne-based businesses in the industry.
According to the measures listed above, there is no single metric for finding the financial stability of a business. Bookkeepers use various financial ratios to understand the efficiency, profitability, ability to pay debts and short-term sustainability of a company in Melbourne.
Thus, it is best to use all of them to determine the financial viability of an entity. All this information is accumulated from the financial reports prepared by the bookkeepers, such as the balance sheet, income statement, cash flow statement and financial ratios.
Bookkeepers are not only the financial managers of the organisation but also the assessors of its performance. They inform the business owner how their company in Melbourne is performing and how it will do in the future.
They identify activities that are not bearing fruitful results and the ones that are proving beneficial, making the business highly productive and profitable.
