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The following figures are for Mike's takeaways, a fast food business, for the previous year:
|Sales (excluding GST)||$400,000|
|Value of his opening stock inventory at the beginning of the financial year (e.g. fish, potatoes, mince, buns, and beverages)||$4,000 and at the end of the financial year was $6,000|
|Cost of the direct materials and inventory during the year in creating the food products for sales (such as fish, potatoes, mince, buns, and beverages)||$192,000|
|Salary and wages for four part-time employees||$80,000|
|Additional expenses (including rent, electricity, and advertisements)||$100,000|
Mike's takeaways had no other sources of income, such as interest or dividends.
From these figures we can work out some of the key financial ratios.
Gross profit ratio
Mike’s takeaways performance is within the industry benchmark. However, looking at where he sits in the range, Mike could improve his profitability. As the gross profit ratio is calculated by looking at the profit obtained from his sales, Mike would need to either source cheaper products for resale, or he may consider increasing his prices in order to increase his level of profitability.
Stock turnover per annum
Mike’s takeaways is holding a minimal amount of stock. The type of stock Mike would have would be mainly perishables, and the quick stock turnover indicates that Mike buys in sufficient fresh stock to service his sales. The low amount of stock on hand shows that Mike is not unnecessarily tying his cash flow up in large amounts of stock on hand. This is a good business practice in Mike’s specific industry.
Salaries and wages/turnover ratio
Mike’s takeaways is within the industry benchmark range. As this ratio reflects an expense to the business, the higher the ratio the worse Mike’s business is performing against the benchmark. Mike is spending a lot of money on wages, and this is probably why his taxable profit ratio is lower.
If Mike looked at these results and used them to aid his business performance, he should consider the following actions:
These actions would increase his gross profit ratio, and increase his taxable profit.