Key financial ratios every business woman in Kenya should know

You don’t need to hate numbers anymore. You can make sense of all your business records by matchmaking them in clever yet easy ways. These are what financial ratios are. Now, there’s many of them but HerBusiness is going to tell you the most important ratios every business woman in Kenya should know and how to interpret them.

1.Profit margin

You already know about this don’t you? Profit margin helps you know how much money is your take-home for every shilling of sale you make. You calculate it by diving your profit by sales. An important thing to note is that there are three kinds of profit. And no, finessing a guy is not one of them. Although you want your profit margin to be high you should be aware that the margin is determined by industry and the type of market you are serving. Your goal should be to have a profit margin that is higher than the average. It will prove that you’re better than most entrepreneurs in your field. Venture Capitalists have a thing for women entrepreneurs like that.

2.Current ratio

Many women running small businesses in Kenya never bother to track working capital until it’s too late. Having money to operate on every workday is the most important thing for a businesses. You can track your business’ ability to meet short term obligation, monthly or annually, using the current ratio. It’s just your current assets divided by your current liabilities. The advised ratio is 2:1. Meaning, the stuff you will be owning for under one year like cash and inventory should cover your short term debt twice over. Don’t hold onto too much money though.

3.Inventory turnover ratio

To make profit you need to make sales. It’s therefore critical that you know how long inventory remains in your hand. The more days you go without selling your stock, the more costs you incur in managing their storage. Divide the cost of goods sold by average inventory, then divide 365 days to get age of inventory.

4.Accounts receivable ratio

What is that secret about debt? You should take as long as is possible to pay it but collect what is owed to you as soon as possible. If your business is not living up to this mantra it means you are depriving yourself of working capital. Do this, divide your sales by accounts receivable (your debtors and credit buyers) and divide 365 days to know the average amount of days you take to collect debt.

5.Debt ratio

Back in the 19th Century, while we Africans were preserving our culture the Europeans were knee deep into concepts like limited liability and cheap credit. Yep! Borrowing money is good. As a sly entrepreneur, you know that leverage enables you to make lots more money despite having little money. All the cons in our economy know this. You’ll be fine as long as you know how much of what you owe is part of what you own. The figure should be around 0.5. If it’s too high you are walking a thin line, if it’s too low you are literally worse than 19th Century Europeans (and they were genocidal!).