Over the past two weeks I’ve written about, in my opinion, the two most critical numbers to track: net profit per hour and overhead cost per hour. This week I’ll write about two more that are critical to track: current ratio and productivity ratio.
Current ratio
Your profit and loss statement doesn’t tell you whether you have profitability, long term profits. It simply states profit for a specific period of time.
Your current ratio tells you about profitability. An increasing current ratio, most of the time, tells you that your profitability is increasing. A decreasing current ratio, most of the time, means decreasing profitability. The times it doesn’t mean increasing or decreasing profitability is when those of you got your PPP loan cash or when you buy a truck for cash or pay a large tax bill. These are non-operational increases or decreases of current ratio should not be considered when looking at profitability.
Current ratio is defined as current assets divided by current liabilities.
Current assets are assets that are cash or turned into cash within one year. Most current assets are cash, accounts receivable from customers (NOT employees or owns), and inventory.
Current liabilities are liabilities which must be paid within a year. Most are accounts payable, payroll taxes payable, deferred income (maintenance plans), and current portion of long-term debt.
If you don’t have inventory on your balance sheet, your current ratio will not be accurate. However, you can still see the trends.
Productivity Ratio
Productivity ratio is also call the percentage compensation ratio. This ratio tells you how efficiently you are using your labor: field, office, and owners.
Productivity ratio is total payroll plus payroll taxes divided by sales.
Payroll includes all payroll: field, office, and owners.
Payroll taxes include FICA, medicare, state, and federal unemployment. You might have additional city or state taxes, depending on your location, that you have to pay for each dollar of payroll. These taxes should be included too.
Do not include worker’s compensation, health insurance or other benefits. Do not include bonuses unless you pay them every month. Commissions should be included.
Calculate this ratio each month. It should be consistent or decreasing which means your company is more productive.
Next week I will write about the last critical ratio.
2025 In Person Class Schedule
Building Profit & Wealth
- January 7-8, 2025 Atlanta, GA
- February 27-28, 2025 Austin, TX
- April 2-3, 2025 Jacksonville, FL
Click Here for more information
Field Manager Survival School
- February 25-26, 2025 Austin, TX
Click Here for more information
Want a financial statement review?
Every business, large and small, can benefit from taking a closer look at its numbers. We’re happy to do a quick review – showing you what appears to be good and some areas you might want to pay attention to. (This is where Financially Fit Business can help too). Click here for more information.
And, pass along this offer to your business friends and colleagues who could benefit from this review too!
Ruth King is well known as “The Profitability Master.” She is passionate about helping small business owners become profitable and stay profitable. For over 40 years she has coached, trained, and helped contractors and others achieve the business growth and goals they wanted to achieve.
Contact Ruth by emailing ruthking@hvacchannel.tv.
