The financial reasonsare those indicators that systems use to measure the economic reality of a company and its ability to take responsibility. Within this system different classifications, here are some examples of financial reasons.
In this article you will find:
Examples of financial reasons
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These indicators comprise countless examples, below we will show some of them:
Example 1 - Inventory rotation
RI = Cost of sale / Average inventory
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Let's think that a footwear company includes:
- Cost of sale: 535,000
- Inventories: 180,000
- The result of the inventory turnover is: 535,000 / 180,000 = 3 times
- Interpretation of results: The company renews its inventories 3 times a year.
Example 2 - Turnover of Accounts Receivable
RCC = Annual Credit Sales / Average Accounts Receivable
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Suppose that two companies have the following sales and accounts receivable:
| Rotation | Company 1 | Company 2 |
| Annual sales | 120,000 | 180,000 |
| Accounts receivable | 20,000 | 15,000 |
The results of the collection rotation are:
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- At company 1: 120,000 / 20,000 0 = 6 times
- At company 2: 180,000 / 15,000 = 12 times
- Interpretation of the result: Company 1 charges its clients 6 6 annually and Company 2 12 times, which indicates that it has a better collection turnover than Company 1.
Example 3 - Working capital
CNT = Current active / current liabilities
In the event that the company were in a situation where it must pay all its current debts in a short period of time, then it would have a surplus of 3,000 euros.
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- Current assets: 6,000.
- Current liabilities: 3,000.
- CNT: 6,000 - 3,000 = 3,000
Example 4 - Rotation of payments
RP = Cost of sales / accounts payable
In this case it is expressed in times, then we have a mattress manufacturer that has in its possession:
- Cost of sales: 535,000
- Accounts Payable: 60,000
- The results of the rotation would be: 535,000 / 60,000 = 9 times (this is rounded to a more exact number)
This means that providers must be paid 9 times a year. If we divide this amount by 360 (the number of days that exist in a business year) it gives us 40 days, that is, how often the payment must be made.
Example 5 - Financial cycle
CF = Collection turnover + Inventory turnover - Payment turnover
The period it takes a company to convert inventories into cash must be expressed in days:
- Sales: 765,000
- Accounts receivable: 156,000
- Collection turnover: 765,000 / 156,000 = 5 (this is the number of times)
To confirm the number of days, the times must be divided into the 360 days that a business year lasts. This equation would give us 72 days as a result, which can be defined as:
- 72 days of collection.
- 120 days of inventory
- 40 days of payment.
Example 6 - Turnover of accounts payable
RCP = Credit purchases / Average accounts payable
The idea of this equation is to get an exact estimate of the time it takes a company to pay its bills:
- Credit Purchases: 30,000
- Average accounts payable: 300
- Final calculation: 30,000 / 300 = 100
As a final result, after taking the division between the annual business days (360) it can be determined that the company takes 3 to 4 days to pay all its obligations.
Example 7 - Dividends per share
DA = Dividends payable / Ordinary share numbers in effect
It is a formula where companies can see reflected the value that is paid for each of the partners and shareholders after distributing the profits:
- Dividends paid: 3,600
- Number of ordinary shares in force: 1,200
- Interpretation of the result: 3,600 / 1,200 = 3 therefore, each of the shares offers a profit of that amount.
Example 8 - Return on investment
RI = Net income after taxes / total assets
It allows to know the profitability of something in particular based on the assets of the company:
- Net income after taxes: 800
- Total asset value: 15,000
- Final results: 800 / 15,000 = 0.053 a result that must be multiplied by 100, which would leave us with a total of 5.3%
Example 9 - Earnings per share
UA = profit from ordinary shares / number of ordinary shares
It is the one that allows to know what the profitability of each of the company's actions is:
- Ordinary share profit: 800
- Number of ordinary shares: 1,200
- Final interpretation: 800 / 1,200 = 0.66, this result is multiplied by 100 and leaves a total of 66% (the profitability of said action evaluated)
The financial reasons They allow you to visualize the business structural situations, in this way you can evaluate the performance and make necessary corrections in the actions for the good of the company.
