Finance and Bookkeeping - Session 11

Ratios and the Finance Scorecard

Calculate a small set of finance measures and explain what each measure includes. Build a scorecard that helps the admin manager and CEO investigate changes without treating a percentage as a complete business diagnosis.

The MSP finance task

Monthly revenue rises while profit falls. The CEO needs more than a sales total. A short finance scorecard can show the change in delivery cost, overhead and collections, provided each measure uses consistent records and periods.

Finance scorecard

A finance scorecard selects measures for regular review. Each measure needs a formula, source, period and business question.

Gross margin

Gross margin is gross profit / revenue. Supplied January-September figures: $357,386.64 / $1,109,891.18 = approximately 32.20%. Close approval remains unconfirmed.

Operating margin

Operating margin is operating profit / revenue. Supplied January-September figures: $100,144.81 / $1,109,891.18 = approximately 9.02%. Review expense classification and close status.

Liquidity measures

Liquidity is the ability to meet due payments. Current ratio divides current assets by current liabilities. Working capital subtracts current liabilities from current assets.

Collection evidence

Receivables aging groups unpaid balances by age or due status. Reconcile the detail before treating unusual balances as evidence of collection performance.

Recurring revenue definitions

Monthly recurring revenue is a contract-based monthly value under a stated definition. An earned-revenue account total requires a contract reconciliation before it represents committed MRR.

Partial October results

The supplied October 1-6 report is partial. Billing occurs on the first day. Payroll synchronization timing does not establish bank payment dates. Missing costs limit profit conclusions.

Scorecard review

The admin manager prepares checked figures and exceptions. The CEO chooses useful comparisons and review thresholds. Each flagged change needs an explanation and a next action.

A period has $100,000 of revenue and $30,000 of gross profit. What is gross margin?

  1. 70% of revenue
  2. 30%
  3. $30,000 divided by all balance sheet assets
  4. 42.9% of the direct cost amount

Monthly revenue varies. How should the admin manager calculate the gross margin for the combined nine months?

  1. Add the nine percentages
  2. Choose the month with median revenue
  3. Divide total gross profit by total revenue
  4. Average the monthly percentages without weighting

October's first-six-day report shows high profit, but payroll entries are incomplete. What should the scorecard show?

  1. A partial-period result with the missing-cost limitation
  2. A revised annual profit target based on six days
  3. An approved monthly result because billing already occurred
  4. A full-month margin extrapolated from the first invoice batch

Key terms

Ratio
A comparison calculated by dividing one quantity by another.
Finance scorecard
A selected set of regularly reviewed measures from financial and related operational records.
Gross margin
Gross profit divided by revenue, expressed as a percentage.
Operating margin
Operating profit divided by revenue, expressed as a percentage.

Three points to remember

  1. Define every formula and use matching periods.
  2. Investigate the records behind a ratio change.
  3. Use dated cash commitments before approving a payment.