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Frequently Asked Questions

KPIs Explained

KPI analysis is an extremely important and under utilised means of understanding the underlying health of a business. Ratio analysis can be likened to getting under the hood of your car. You know your car works, drives ok, passes its annual inspection but do you really know what is really going on? What problems are starting to appear with the workings of your car. KPI analysis is like getting under the hood and checking the oil and water levels, brake fluids, air filter etc. They can give you a great insight into underlying risks or opportunities within your business, often before they are readily apparent within your financial statements such as P and L and Balance Sheet.

Download our KPI and health score reference guide

Your Jazoodle Business Health Score

The business health score is the first place to start in assessing how your business is doing! Your score will change over time, and it is important to assess this regularly and to ensure that underlying performance trends are as you expect. The score can give you early warning of changes to the underlying success of your business.

Jazoodle Health Score

Jazoodle business health score simply let’s you know how your business is doing! it is updated every week, or on demand and reflects the overall health and wellbeing of your business. It is affected by a number of things, such as your revenues, your profit margins, your financial liabilities, amount of cash at your disposal, and the size and effectiveness of your asset base. Below, we detail how you can improve your Jazoodle business health score

your health score is a really good advance indicator of the health and wellbeing of your business. it can give you critical advance warning of changes to the underlying state of your business, or even changes to policies or practices happening in your business. For instance, it can give you an indication as to how hard your assets are working for you, excessive discounting happening, or a critical period of cash dangers.

Should your score be changing or declining over time, it is important to understand why, and how you can make changes in your business to affect future scores. Clicking on the graphic above will download your improvement graphic, giving some hints and tips in changing your business score.

The first place to start is in checking your sales revenues and profit margins. In your reports section of Jazoodle, and check the following:

Total Sales Revenues. Compare to previous periods – are they static, growing, or declining.

Check your gross profit margins in the main dashboard and KPI area and look for trends.

If your gross margins are falling, this will mean one of two things: either discounting your price, or your input costs are rising, or both.

Also check your net profit margins and look for trends. If they are changing, then if there are no changes to your gross profit margins, then assess your overheads or rates of depreciation

Liquidity Ratio

Your Liquidity Ratio is your ability to pay your immediate liabilities from your short term assets within your business. Check trends in your graphs both on an annual as well as monthly basis.

What can you do if your liquidity rates are changing? 

Implement a consistent payments and client credit policy. Ensure that your client payment terms are at least on par with your supplier payment terms 

Assess your average client receivables period. Can you put in place strong client collection measures or even instant purchase?. Do you stick to your supplier payment terms and not pay supplier bills early? 

Also it is worth assessing whether invoice financing is efficient for your business or other tactics such as selling off old stock to increase cash reserves. The ultimate aim is to see your Cash Runway, (or your cash reserves and immediate funds)  climb over time

The first place to look, is your Asset Turnover Ratio. This measure tells you how hard your assets are working for you. Put simply, for every dollar/pound of assets you have on your books, how much revenue is generated? In the above example, only 7 cents/pounds of revenue is generated for every dollar/pound of assets. Not a sustainable measure. The goal is to be making at least a score of 1.0

How efficient are your operations? This is a big question, but you can assess this at a high level. Check the amount of Revenue Per Employee for instance. Is this figure moving over time? If it is falling, is this down to sales revenues falling with static staff numbers or if these are static or indeed increasing, this could indicate staffing productivity may need addressing. It could also mean you are overstaffed. Also check overheads per employee and of course asset turnover

Profitability Ratios

Cash is king! But profit generates excess cash. Understanding your underlying profitability is critical to a healthy and sustainable small business. But so many more insights into underlying profitability and costs can be gleaned than in your profit and loss statement. Here we look at some underlying measures – measures that are often relative type measures.

Net Profit Margin

Definition Used: Total Net Profit(Loss) /Total Revenue

Net Profit Margin describes the amount of value generated by a business within a period after all direct cost of sales, general overheads/expenses, and financing costs are considered.

Net profit does not necessarily indicate the positive levels of cash generated by a business. However, it is a reliable time-based measure for gaining an understanding into the overall value that the business is providing to its stakeholders. If you find your net profit margins changing, this either will be because of a change in your gross margins (see above) or equally, that your general expenses, wages or other non-direct costs are changing. If net margins are reducing, check one of the other measures such as COGS: EBITDA (to check direct cost of sales costs), or Expenses:EBITDA (to check general expenses trends).Note – if both of the COGS:EBITDA and EXPENSES:EBITDA measures are stable, then there may not be a problem at all – and could be accounted for by an increase in depreciation following an asset purchase. Check this out by assessing the Expenses:Net Profit measure

Gross Profit Margin

Definition Used: (Total Revenue – Direct Costs)/Total Revenue

Gross Profit Margin is hugely important for understanding your revenues are in relation to your direct costs of providing your goods or services. If your gross margins are changing over time, check that you aren’t excessively discounting your goods or services, or that input costs are getting out of control. In the latter case, can you become more efficient in producing those outputs, or if your volumes are increasing, can you negotiate better supplier terms?

Definition: Net profit earnt for every unit of owners equity (Capital + Current earnings + Retained Earnings)

EPS (Earnings Per Share) For public companies, Earnings Per Share is a measure that assesses how much revenue is earned in relation to its underlying equity capital structure. The higher the EPS, the better the general health of the business. Please note, it is not possible for Jazoodle to identify how many shares may have been issued by the company. For this reason, we assume total shareholders equity as being the sum of paid up capital, retained earnings, and current earnings. This may not be accurate, but if used consistently over time, should provide a great way  of  understanding underlying profit performance, relative to the amount of funds that have been invested in the business from an equity perspective

Definition: Total equity per total net asset then divided by  net profit per unit of owner’s equity

PE (Price/Earnings) Ratio Based upon the assumptions used to create the EPS measure, this calculation is also based upon a strict asset value of the business and relates to the number of shares that are assumed to have been issued, and is then related to the EPS measure outlined above. Generally, the higher the Price/Earnings ratio the more likely it is that the company will be expected to further improve its performance in future years.

We use EBITDA or earnings before interest, tax, depreciation and amortisation as a solid measure that is not affected by any asset or capital purchasing or the finance derived to purchase such assets or capital equipment or the effect of a good prior year and increased tax bill

Definition: Total direct costs as a percentage of total net profit

COGS:Net Profit This ratio is as per the COGS:EBITDA measure, but with the effects of depreciation and accounting choices also taken into account. For instance, if COGS:Net Profit is falling, but Expenses:EBITDA is stable, this may indicate that depreciation expense is increasing, which in turn could either mean a capital investment program (which could be positive for the business) or change in depreciation policy (which could have a negative impact). This measure should also be assessed in conjunction with changes in other expenses, which may indicate if financing costs are increasing. For example, the Debt : Equity measure could be checked to confirm if this is the case.

Definition: Direct costs related to net earnings minus depreciation and other elements

COGS:EBITDA Compares the Cost of Goods Sold (COGS) in relation to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). If net margins are falling, this will partially show you if the problem is in stock purchasing, or as a result of general overhead problems. Please read in conjunction with the gross profit margin definition

Liquidity Ratios

Liquidity is simply a means of understanding a company’s susceptibility to either current of future financial distress, and the risk profile of the business. It should be noted however that a single “safe” liquidity measure does not exist across all industries. For instance, some industries traditionally and successfully trade at low liquidity levels, whereas the same figure may be a sign of distress in another sector.

Liquidity Ratio

Definition: Total Current Assets (including stock) compared to Total Current Liabilities

The Liquidity Ratio gives a relative measure of current liabilities compared to current assets. Generally, you would be looking for a figure greater than 1, for instance a company has at least enough assets to cover its liabilities. However, it is very important to also understand how liquid these assets are. For instance, if all of the creditors demanded payment at the same time, how much could realistically be raised in enough time to pay them? Would this cover the liabilities? Overcoming this can be achieved by using a Quick Ratio (see above). Please also note that some industries traditionally trade on very low or high measures.

Definition: Total current assets (less stock) compared to total current liabilities

The Quick Ratio overcomes some of the issues with the Liquidity Ratio measure and only assesses those assets which have the potential to be liquidated quickly. This ratio ideally should not include inventories as sales of inventory rarely achieve the value that may be on the books. A figure above 1 again is considered to be acceptable. However, the higher the value, the better.

Definition: Cashflow from operating Activities compared to total Assets

The Cashflow to Total Assets indicator provides an understanding of how cash is generated relative to the asset base of the company. Generally, the higher the indicator, the more efficient the asset base of the company is in generating revenues. Generally, this should be greater than 1 – i.e. $1 of asset generates $1 of revenue. Please note, that Jazoodle calculates the Cash generated from operating activities only and ignores cash from financing or investing.

Definition: The average amount of money spent on all expenses each month over the past year

This measure tells you your average monthly outgoings spend and used in part for your cash runway calculations

Definition: The amount of cash at hand compared to your average monthly gross burn rate. The measure shows the number of months (or part months) runway you have

Suppose that all sales stopped within your business tomorrow. How long could you remain solvent? This measure, tells you in the number of months what your cash runway is or how long you can remain solvent should no sales eventuate – such as in a Covid lockdown, or other catastrophic event.

Efficiency Ratios

Efficiency ratios are a great way of analysing the underlying operational or investment efficiency of a business. For instance, Jazoodle assesses the efficiency that a company has in collecting its debts, or how effective its capital programs are in generating revenues.

Definition: The average number of days it takes to collect client debt. Note, for monthly calculations, we use the change in accounts receivables as the base number

Days Sales in Receivables Taking the Receivable Turnover (RT) ratio further, it’s possible to estimate the number of days it takes to recover trade debtors’ accounts. The higher the figure, the less efficient the business is in collecting its client debts. Watch for this over time and look for any deterioration. An overhaul of accounts receivables processes or client communications may be needed. Alternatively, it could reflect the winning of a large account, with a client who perhaps takes longer than average to pay, but who may always do so. If this is  the case, assess in conjunction with other measures, such as profitability measures or liquidity measures.

Definition: total spend on overheads and COGS related to Accounts payable amounts and averaged out. For monthly figures, we use the change in accounts payables amounts

This measure assesses how efficient your supplier payment policies and practices are. Check for changes over time plus also ensure this figure is not less than your average receivables period.

Definition: Total spend on direct costs related to total inventory amounts averaged over a year

Days Sales in Inventory In conjunction with the Inventory turnover ratio, this measures the number of days it takes to sell stock. The greater the number, the older the stock is likely to be.

Definition: Total Income divided by total assets

Asset Turnover Ratio (ATR) This is a great measure to use to help assess the effectiveness of a business to generate cash/sales from its asset investments. Look for an increase over time. Generally, a figure greater than 1 (preferably a lot greater) is advantageous and shows that a company has invested wisely in its capital investments. If this measure declines over time, it is worth investigating where the decline is coming from. For instance, if Return on Assets is also falling, it is worth questioning whether the decline is coming from a reduction in profit margins or a change in asset turnover – or even a combination of the two.

Definition: Total COGS divided by Total Inventory Amounts

Inventory Turnover Period (INVTURN) If stock is held for sale, a critical measure is likely to be the Inventory Turnover Ratio, or the measure of how quickly stock sells over time. The larger the measure, the older the stock is likely to be. Therefore, should a competitor launch a better product, a company may be saddled with stock it cannot sell.

Definition: The level of sales compared to the level of credit outstanding with your clients.

Receivables Turnover (RT) The Receivables Turnover measure assesses the level of cash sales relative to credit. For instance, if total sales are $100 and a company has $50 in accounts receivables, the measure would be 2 – or cash sales are twice as common as credit sales. A low figure may indicate that underlying cashflow issues may surface from time to time. Please note that it is not possible for Jazoodle to identify how many sales are created by offering credit to a company’s customers. However, this can be estimated by relating the total revenue to the number of debtors that a business currently has in place. Therefore, the Receivables Turnover is based upon this assumption.

Asset Utilisation Ratios

Overall investment returns are assessed using asset utilisation ratios. These ratios give insight into how well the company performs in generating returns from its operational activities.

Definition: Revenue per employee measures the Operating Revenue generated by each employee in your business.

Revenue per employee is a must have measure and shows you how productive your business is, or even whether it is under or over staffed. Look for changes over time using the time series graphs in your Jazoodle. Acceptable revenue per employee figures will vary by industry but aim for a figure of at least 1.5 times the average wage cost at a minimum. Jazoodle uses a figure of 175,000 as a benchmark.

Definition: The amount of expenses generated for every employee in a period.

Overhead Per Employee is a cool measure that allows you to ensure that you can assess undue wastage in your business.

Check over time that it is consistent. If changing, review your expenses lines within your Profit and Loss Reports

Definition: The amount of total net profit earned by each employee in your business

Another measure as to how efficient your business is running. Again, check this over time and assess changes to your underlying business

Solvency Measures

Understanding the financial structure of a business is critical for assessing how a company finances its future growth, or market sustainability activities.

Jazoodle Health Score

The first place to look to understand sustainability of your business. We use a scale system to determine your business health. Aim for a figure above 180 and aim for this consistently. In the section above, we show you ways in which you can improve your health score.

Definition: Debit to Equity measures the total amount of debt the company is carrying, relative to the amount of total equity within it.

A figure greater than 1 shows the company is mainly structured via debt instruments. If the indicator is below 1, the company is mainly equity-based. Use this measure to assess the appetite of debt funding. If the figure is too high, this could indicate a risk with the company being too highly geared or reliant on debt funding

Definition: The amount of cash generated from operating activities in the business compared to total assets within the company

We use the figure from the statement of cashflows, and only assess cash generated from operating activities, and ignore financing and investment activities. Note, cash from operating activities does not mean sales, and takes into account payments from sales collected and to suppliers paid out 

Definition: The relationship between the company’s ability to generate profit compared to the asset base of the company

Definition: Depreciation and other items are added back into the net profit figure and then compared to total assets

Definition: The amount of shareholders funds available in relation to total liabilities