Change is embracing opportunity in business and most businesses have huge unrealized potential. Change is driven by business consolidation and business globalization. The best you understand fundamental changes in the market, the best profit you will have. Hence, we should not be afraid of making changes in our business.
MERIT, a recipe for success in business:
- M : Monitor your cash flow, make it positive. (Minimize the risk of financial dilemma)
- E : Enlarge your view, make a great vision. (Avoid "ivory tower" disease and induce new investment)
- R : Restructure your business, make it competitive. (For a sustainable growth)
- IT : Increase your sales, make it by tactics. (Never just by price)
Nine financial ratios for a general checkup on your business
- Berry Ratio: Gross Profit / Operating Expenses. It shows the profitability. If ratio is higher than 1, the business is profitable. If lower than 1, the business is at a loss.
- Quick Ratio: (Current Assets - Inventory) / Current Liabilities. It shows the capability of settling short term loans. It should be 1 or higher. The higher the ratio, the greater the liquidity, and less chance to have cash flow problem.
- Debt-to-Assets Ratio: Total liabilities / Total Assets. It measures the solvency of a business. A ratio greater than 1 indicates excessive borrowing and a greater risk of financial dilemma.
- Debt-to-Equity Ratio: Total liabilities / Equity. It indicates the relative proportion of shareholders' equity and debt used to finance the assets of a business. The higher the ratio, the greater risk of bankruptcy.
- Net Profit Margin: Net Profit / Turnover x 100%. It shows the profitability. The higher the ratio, the greater profitability. However, it has to be compared with previous year's.
- Inventory Turnover: Cost of Sales / Average Inventory. It shows the speed of inventory turnover. The higher turnover rate, the higher net income and profitability. The lower turnover rate, the higher probability of overstocking and obsolescence.
- Cost-to-Income Ratio: Operating Cost / Operating Income. It measures the efficiency at generating profits from operating cost. The higher the ratio, the higher efficiency.
- Return on Asset (ROA): Net Profit / Total Assets. It measures the efficiency at generating profits from assets. The higher the ratio, the higher efficiency.
- Return on Equity (ROE): Net Profit / Shareholder Equity. It measures the efficiency at generating profits from shareholders' equity. The higher the ratio, the higher efficiency.