General Ledger Formulas

The Formulas reports can be run for a month, quarter, or year to  date.  Ledger data is computed for 8 common accounting ratios used in business. These are  calculated from the General Ledger automatically when the report is selected. These reports include:

Current Ratio

The current ratio is very commonly used to measure the financial strength of a company.  It measures the ability of a company to pay its current liabilities by using only the current assets.  A base ration of at least 2:1 is preferable, but a higher value is considered better.

Quick Ratio

The quick ratio combines the total cash resources ( cash + securities + accounts receivable ) divided by the total current liabilities.  This is another measure of a company's ability to pay its debts.  A minimum ration of 1:1 is desired.

Average Collection Period

The average collection period is the averate number of days it takes to collect your accounts receivable.  It is important that this figure be kept to a minimum.  Generally, your average collection period should not exceed 1.33 times your net terms.  In addition, small businesses should focus on net terms being kept low, ie. 10 to 15 days from the date of the invoice ( not the statement ).

Return on Equity

This formula measures the return received on the capital you have invested in the business.  Compare this figure to money you would be earning if the capital were invested in other resources, ie. bonds, mutual funds, etc., for a perspective on how well your business is doing for you.

Gross Profit Margin

This formula is usually seen as a measure of how well the business is controlled.  Specifically it looks at inventory control, production efficiency, and pricing effectiveness.

Net Profit on Sales

This is a comparison between the total money earned by your company, and what you are spending to operate.   You will want to monitor this value across time, and also to seek statistics on how other businesses in your industry fare on this measure.

Return on Assets

This is considered to be an evaluation of how effectively a company manages its assets to generate a profit.

Debt to Net Worth

This value will be important to those who loan you money.  It measures the relationship between the capital invested by the owners, and funds borrowed from others.  A value of 1.0 or less is desirable.  The lower the figure, the stronger your credit rating will be.