Financial and Productivity Ratios

Net Operating Profit - Profits can be calculated in either dollars or percent of sales over a given period. Subtract expenses from the gross margin to obtain the dollar figure.

Example:

$150,000 - $145,000 = $5,000 Net Operating Profit before income taxes. Divide the net profit by sales to get the percent of sales:

$5,000 / $400,000 = 1.00%.

Profits may be increased through better controls, increasing gross margins, increasing sales, or some combination.

Return on Owner's Equity - This measure combines a balance sheet item, owner's equity, with an operating statement item, profits. Profits are divided by owner's equity. It provides a rate of return for the capital the owner has invested in the business.

Example:

$5,000 Before Tax Market Income / $10,000 Owner's Equity 50% Return on Owner's Equity, before tax.

Return on equity may be increased by improved cost control, increasing sales, increasing margins, and the wise use of borrowed capital.

Return on Investment - This ratio measures the return on total capital of the business, including owner's equity. Divide total liabilities into profits. This is considered a bottom line financial measure.

Example:

$5,000 Profit / $141,000 Total Liabilities = 4.00% Return on Investment, before tax.

Return on investment may be increased by better control of costs, increasing sales, increasing margins, or some combination.

Inventory Turnover - This measures productivity within the market and considers how often inventory is sold or turned.

Example:

$250,000 Cost of Sales / $30,000 Average inventory Value = 8.33 times per year inventory Turns.

Increasing inventory turns may improve the operating efficiency of the market. This measure requires aggressive inventory controls such as reducing or discounting slow-moving items.

While other measures of operating efficiency and capital ratios are important, the preceding four represent a start in setting some of the standards desirable for farm market operators. Consult an accountant, management specialist, or a standard financial text for more detailed information.

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