Business Advice

Business Ratios for your cafe.

Business Ratios for your cafe.

Original Date 03/11/16

Updated 30/03/18

Cafe owners do know how ratios work in the day to day running of their business, this week I will be looking at some key ratios you can apply.

Ratios are a great method of figuring our businesses strengths and weakness. I use a range of ratios to monitor key areas which are important in the hospitality industry.

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Apply ratios to your business.

You should play with your ratios, in the past I used last year’s financial statements as a guide when reviewing management accounts and to setting budgets. But if your cafe is seasonal it is important to know why you might have difference from the norm.

In order to apply ratios you do need.

– Profit and Loss statement.

– Balance Sheet.

review and record  various business ratios and it will be possible to calculate what an average becomes. Then test the average against indusry standards and change the variables.

Ratios

Profitability Ratios (Profit & Loss Account)

This tells us how well a business has performed by comparing it various costs to the sales made over the period.

  • Gross Profit (Sales less Cost Of Sales / Sales x 100%)
  • Net Profit (Gross profit less expenses / sales x 100%)

Use industry norms to establish how your cafe is performing with larger businesses. This ratio will tell you if your prices are too low or your costs are too high.

Efficiency Ratios (profit & Loss account, Balance Sheet)

This tells us how well the business derived economic benefit from the stock and assets used.

  • Asset turnover ( Sales / Total Assets)

Liquidity Ratios (Balance Sheet)

This tell us how liquid a business is, (can a business pay for the suppliers of the business using assets )

  • Current Ratio (Current Assets / Current Liabilities)    2:1
  • Quick test ratio (current assets – Stock / current liabilities)    1:1

Current assets are your cafes are stock & trade wholesale customers whom owe the cafe money. Current liabilities are short term loans or suppliers which fall due in less than one year.

Leverage Ratios (profit & Loss account, Balance Sheet)        

This tells us how dependent a business is on debt finance, the higher the ratios the more risky.

  • Gearing ( total borrowings / total borrowings + equity)
  • Interest Coverage ratio ( PBIT / Interest )

PBIT (profit before interest and tax)

Conclusion

Your cafes should aim to achieve a consistent gross profit across a basket of products, coffee and tea will achieve a higher margins than a toasted chicken sandwich hand made to order.  Look at how pockets of items are sold together.