Business Ratios and Formulas: A Comprehensive Guide, Second by Steven M. Bragg

By Steven M. Bragg

Required interpreting for a person beginning, working, or transforming into a enterprise, enterprise Ratios and formulation, moment variation places solutions on the fingertips of commercial managers, with approximately 250 operational standards and transparent, easy-to-understand causes that may be used without delay. the second one variation contains nearly fifty new ratios and formulation, in addition to new chapters overlaying ratios and formulation for e-commerce and human assets.

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18. 18 Before Acquisition Maximum sales capacity Current average sales Gross margin percentage Total operating expenses Break-even point Operating expense reductions Revised break-even level Maximum profits with revised break-even point $10,000,000 $9,500,000 35% $3,500,000 $10,000,000 $750,000 $7,857,000 $750,050 level is the same as its maximum productive capacity. However, the removal of some key overhead costs reduces the break-even point to such an extent that the acquirer will be able to generate a significant return from the existing sales level.

Cautions: Overhead costs tend to be fixed in the short term, while the mostly direct costs included in the denominator will vary with sales. qxd 9/13/06 12:37 PM Page 29 Asset Utilization Measurements / 29 ratio can vary substantially from period to period if sales fluctuate considerably. To avoid this problem, it may be necessary to use an average cost in the denominator that consists of a rolling average that covers multiple reporting periods. By doing so, there will be no sharp fluctuations in the denominator, thereby making the comparison to overhead costs more useful.

The formula is: Annualized revenue ——————————— Total full-time equivalents A variation on this ratio is to divide annual revenues by only those FTEs that can be categorized as direct labor. This measures the productivity of those personnel who are directly connected to the manufacture of a company’s products or services. This measure should be used with care, since it is not always easy to determine which employees can be categorized as direct labor and which ones fall into the overhead category instead.

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