Using financial ratios
When banks and other lenders want to understand the strength of a business, they typically use financial ratios. Financial ratios can provide unique insights about a business, and they can help to measure trends and progress. They are extremely useful for small business owners that want to know how their business is performing from a financial perspective.
Here are some of the key ratios to consider:
1. Cash flow to Debt = (Net Income + Depreciation) / Total Debt
This ratio can help to predict liquidity problems.
2. Net Profit Margin = (Total Revenue – Total Expenses) / Total Revenue
This ratio shows how successful a company is at managing costs (for a hotel, everything from staff costs to cleaning supplies and marketing) and converting revenue (chiefly, income from guests) to profit.
3. Gross Margin = (Sales – Cost of Goods Sold) / Total Sales
This ratio can alert you to issues you may have paying operating expenses.
4. Sales per Employee = Annual revenue / Number of employees
This is a useful metric to help estimate staffing level during recovery – for a hotel, the relationship between occupancy rate and staffing levels.
To use ratios effectively, you will need to set up a spreadsheet for tracking and then pick a timeframe that you can commit to, such as on a quarterly basis. If you are using accounting software, you will likely be able to access a ratio analysis. Enlist the help of your accountant for an expert opinion and advice on how to action insights.