| Net Sales | = Turnover of Total Operating Assets Ratio |
|
| Total Operating Assets* |
Obviously, an increase in sales will necessitate more operating assets at some point (sales may rise without additional investment within a
given range, however); conversely, an inadequate sales volume may call for reduced investment. Turnover of Total Operating Assets
or sales to investment in total operating assets tracks over-investment in operating assets.
*Total operating assets = total assets - (long-term investments + intangible assets)
Note: This ratio does not measure profitability. Remember, over-investment may result in a lack of adequate
profits.
| Net Sales | = Net Sales to Tangible Net Worth Ratio |
|
| Tangible Net Worth* |
This ratio indicates whether your investment in the business is adequately proportionate to your sales volume. It may also
uncover potential credit or management problems, usually called "overtrading"
and "undertrading."
*Tangible Net Worth = owner's equity - intangible assets
| Gross Margin* | = Gross Margin on Net Sales Ratio |
|
| Net Sales |
By analyzing changes in this figure over several years, you can identify whether it is necessary to examine company policies relating to
credit extension, markups (or markdowns), purchasing, or general merchandising (where applicable).
*Gross Margin = net sales - cost of goods sold
Note: An increase in gross margin may result from higher sales, lower cost of goods sold, an increase in the
proportionate volume of higher margin products, or any combination of these variables.
| Operating Income | = Operating Income to Net Sales Ratio |
|
| Net Sales |
This ratio reveals the profitability of sales resulting from regular business as well as buying, selling, and manufacturing operations.
Note: Operating income derives from ordinary business operations and excludes other revenue (losses), extraordinary items,
interest on long-term obligations, and income taxes.
| Applications Accepted | = Acceptance Index |
|
| Applications Submitted |
Obviously, a high sales volume that comes from just two or three major accounts is much riskier than the same volume coming from a large
number of customers. Losing one out of three major accounts is disastrous, while losing one out of 150 is routine. A
growing firm should try to spread this risk of dependency through active sales, promotion, and credit departments. Although the
quality of customers stems from your general management policy, the quantity of newly opened accounts is a direct reflection on your sales
and credit efforts.
Note: This index of effectiveness does not apply to every type of business.
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