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Industry benchmarks Ngā paearu ahumahi

Example for Mike's takeaways

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

  1. Cost of goods sold is the opening stock on hand $4,000, plus the purchases of direct materials and inventory $192,000, less the closing inventory $6,000

    Total = $190,000
  2. Gross profit is total sales $400,000 minus the cost of goods sold $190,000 

    Total = $210,000
  3. Gross profit ratio = gross profit $210,000 divided by $400,000 sales × 100

    Gross profit ratio = 52.5%

What does this mean for Mike’s takeaways?

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

  1. Stock turnover per annum = cost of goods sold divided by average inventory. Average inventory can be calculated by adding opening stock $4,000 plus closing stock $6,000, then dividing by 2
  2. Stock turnover per annum = $190,000 divided by (($4,000 plus $6,000) divided by 2)
    Stock turnover per annum = 38 times

What does this mean for Mike’s takeaways?

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

  1. Salaries and wages/turnover ratio = salaries and wages $80,000 divided by sales $400,000 × 100
  2. Salaries and wages/turnover ratio = $80,000 divided by $400,000 × 100
  3. Salaries and wages/turnover ratio = 20%

What does this mean for Mike’s takeaways?

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:

  • Increase the sale price of his products
  • Reduce his wages costs.

These actions would increase his gross profit ratio, and increase his taxable profit.