Bench Marking Your Business - CFMA

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Benchmarking Your Business

Presented by

Edward Lette, CPABusiness Bank of Texas, N.A.



Types of Benchmarking

• External Benchmarking – Comparing keyfinancial and performance indicators toother companies within your industry

• Internal Benchmarking – Comparing keyfinancial and performance indicators withinyour company, including comparisons to

history, budgets and within divisions oreven projects



Financial Ratio Categories

• Liquidity Ratios

• Profitability Ratios

• Leverage Ratios• Efficiency Ratios



Liquidity Ratios

Liquidity Ratios – used to measure thequality and adequacy of current assets tomeet current obligations as they come

due.



Liquidity Ratios, continued

• Current Ratio – Indicates the extent towhich current assets are available tosatisfy current liabilities. Usually

stated in terms of absolute values(i.e., 2.5 to 1.0 or simply 2.5).

Computed as:Current Assets / Current Liabilities




• Quick Ratio – Indicates the extent towhich the more liquid assets areavailable to satisfy current liabilities.

Usually stated in terms of absolutevalues. A quick ratio of 1.0 generally isconsidered a liquid position.

Computed as:

(Cash and cash equivalents+short term investments+net tradereceivables)/Current Liabilities




• Days of Cash – Indicates the number ofdays revenue in cash. Generally 7 daysis considered adequate.

Computed as:

(Cash and cash equivalents) * 360 / Revenue




• Working Capital Turnover – Indicatesthe amount of revenue being supportedby each $1 of net working capital. A

ratio exceeding 30 may indicate a needfor increased working capital tosupport future revenue growth

Computed as:

Revenue / Working Capital



Profitability Ratios

Used to assist in evaluating managementperformance.



Profitability Ratios, continued

• Return on Assets - Indicates the profitgenerated by the total assets employed. Ahigher ratio reflects a more effective

employment of company assets. Thisratio is generally presented in terms ofpercentages.

Computed as:

Net Earnings / Total Assets




• Return on Equity – Indicates the profitgenerated by the net assets employed.This ratio reflects the stockholders’ return

on investment as a percentage.

Computed as:

Net Earnings / Total Net Worth




• Times Interest Earned – Reflection of thecompany’s ability to meet interest expense

from operations. Overall indicator of

leverage balance

Computed as:

Net EBIT / Interest Expense



Leverage Ratios

Leverage ratios are key measurements indetermining the company’s vulnerability to

business downturns as well as the

capacity for credit and internal capitalneeds. These ratios consider variousrelationships between stockholders and

creditors, owners investment in fixedassets and others.



Leverage Ratios, continued

• Debt to Equity - Indicates the relationshipbetween creditors and owners. Thisrelationship varies on type of industry /

specialty.

Computed as:

Total Liabilities / Total Net Worth




• Revenue to Equity – Indicates the level ofrevenue being supported by each $1 ofequity.

Computed as:

Revenue / Total Net Worth




• Asset Turnover – Measures the level ofrevenue being supported by each $1 ofassets. This is a good measurement for

the effectiveness of asset expansion.

Computed as:

Revenue / Total Assets




• Fixed Asset Ratio – Measures the level ofstockholders equity invested in net fixedassets. Need to consider the effect of off-

balance sheet financing.

Computed as:

Net Fixed Assets / Total Net Worth




• Underbillings to Equity – Indicates thelevel of unbilled contract volume beingfinanced by the stockholders. Generally a

ratio of 30% or less is target.

Computed as:

(Unbilled Work + Costs in Excess) / Total Net Worth




• Backlog to Equity – Indicates therelationship of signed or committed workto total stockholders’ equity. High ratios

may indicated the need for additionalpermanent capital.

Computed as:

Backlog / Total Net Worth



Efficiency Ratios

Measurements of the effectiveness ofutilizing current assets and managingcurrent liabilities.



Efficiency Ratios, continued

• Backlog to Working Capital – Indicates therelationship between committed work andworking capital. High ratios may indicate

the need for additional permanent workingcapital.

Computed as:

Backlog / Working Capital




• Months in Backlog – Measures thenumber of months needed to complete allcommitted work.

Computed as:

Backlog / (1/12 of revenue)




• Days in a/r

• Days in a/p

• Days in inventory All indicate the number of days to liquidate.

Computed as:

((Net a/r - Retainage) * 360) / Revenue(Accounts Payable – Retainate) * 360 / Total cost

Inventory * 360 / Cost of Sales




• Operating Cycle – Indicates the length oftime for the company to complete a normaloperating cycle. A low ratio may indicate a

need for more working capital.

Computed as:

Days in Cash + Days in A/R + Days in Inventory – Days in A/P



Others

• Gross Profit

• Interest as a Percentage of Gross Profit

• Coverage Ratios



Now What?

• Understand the limitations of industry comparisons

• Understand the importance of historical

comparisons • Build a list of key performance indicators

for your company and build goals around

improvement • Work with your users to determine what is

important to them



Benchmarking Your Business

Questions?

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Bench Marking Your Business - CFMA

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