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Use numbers to tell your business story

Use numbers to tell your business story

Financial statements can do more than snapshot the health of your business. Dig deeper into your financial figures to see:

  • what’s running smoothly
  • where you need to focus to get back — or stay — on track.

This helps you spot risks and opportunities for your business. Plus you can compare its performance to other New Zealand businesses.

Numbers you need to know

Numbers aren’t the only thing that matters in business. But they can help, whatever your goals. Knowing your financial figures helps you avoid nasty surprises with the money flowing in and out your business. You can use numbers to analyse ways to help your business survive and thrive.

As well as key figures from your financial statements, it’s a good idea to master the equations, or ratios, explained on this page. Each shows you something different about your business. Your accountant or advisor can calculate the results for you and discuss ways to improve.

Other people crucial to your business will also be interested in these numbers, and will expect you to know at least the key figures. Lenders and investors will want to see and talk about your financial figures to see if it’s worth giving you money. And you’ll be able to have more in-depth and valuable discussions with your financial advisor, mentor or board of directors, if you have one.

You can also use these numbers to compare your business to others in New Zealand. It’s a great way to put a dollar value to your business, especially if you are seeking investors or looking to sell up and move on.

Case study

Case study

Sam the house painter

Equation: operating cash flow ÷ current liabilities

Sam regularly dips into the red to buy paint for the next job. He tends not to worry too much, as he’s busy year-round. Now he wants to buy a van so he can transport his gear more easily, and take on bigger jobs.

To save for a deposit, he’s just improved his invoicing process to get more money coming in on time. His partner Alex, who does the books, is keen to keep track of their progress towards better cash flow.

Alex sets up an equation, or ratio, in the accounting spreadsheet: operating cash flow (on cash flow statement) ÷ current liabilities (on balance sheet)

For the year to date, it shows the amount of money coming in is half the amount of money going out. The equation looks like this:
$20,000 ÷ $40,000 = 0.5

What’s good, what’s not: If the ratio is 1.0, it shows money that’s recently come in to the business equals money due to go out. If it’s more than 1.0, Sam has more money coming in from customers than he spends, eg for paint and other bills.

But if it’s below 1.0 — which Sam’s is, at 0.5 — his current outgoings are more than the money coming in.

Alex checks this ratio in the monthly accounts, and each quarter, to see if it’s above 1.0 — or getting closer to this benchmark figure.

Over the following year, more customers pay on time. This improves Sam’s operating cash flow, freeing up money to buy paint and save for a deposit on a van. On his balance sheet, his cash assets go up and his accounts receivable drop.

See Sam’s before and after figures in our sample balance sheet:

Follow Sam as he uses forecasting to decide how much he can afford to spend on a new van.

Set up your equations

To track your business performance, set up calculations in your statements or accounting software, or ask your accountant or advisor to do this for you. Accounting software companies typically offer a range of standard and customisable equations, charts and graphs — and you can set alerts if you approach a limit you’ve set.

These equations are often called ratios, as they measure the difference in size or amount between two things. A simple example is a coffee cart that aims to spend $80 a day to sell $100 worth of drinks. This ratio is 0.2 or 20%.

You can:

  • focus on key figures in your statements, eg operating cash flow
  • set up your own equation(s)
  • use the equations explained below, eg gross profit margin or contribution margin.

Which equation(s) will be most useful depends on your business, industry type, and any risks you spot in your financial statements.

The case studies on this page show how different businesses use their financial figures to spot problems or opportunities, and track progress towards their goals:

  • House painter — cash flow problems as customers take a long time to pay.
  • Software start-up — ballooning operating costs eat into money needed for growth.
  • Bakery — deciding if it’s better to open a second shop or seek more business customers.
  • Clothing designer — deciding if it’s worth reducing her cost of goods sold.
Case study

Case study

Leni's benchmark

Equation: operating expenses ÷ total sales

Merryn and Leni want to spend money on growing their business, not on rising rents. So they’ve ended their expensive lease and moved into a co-working space popular with tech firms.

The aim is to keep workspace costs below 10% of their software start-up’s total sales. This means they’ll have money to spend on improving their offerings and getting more customers.

Leni sets up an equation, or ratio, in the accounting software:
operating expenses ÷ total sales

For the year before moving into the co-working space, the equation looks like this:
$320,000 ÷ $2,820,000 = 0.11, or 11%

In the year after moving, the equation looks like this:
$190,000 ÷ $4,100,000 = 0.05, or 5%

Leni checks this ratio monthly to make sure fixed costs stay below the 10% target.

Find out how he made the decision to move to a shared workspace on our financial statements page — and see Leni’s before and after figures in this sample profit and loss statement:

Follow Merryn and Leni as they uses modelling to decide how much it will cost to expand into Australia.

Operating cash flow = operating income + depreciation + change in accounts receivable + change in accounts payable + change in accrued expenses

Operating cash flow = operating income + depreciation + change in accounts receivable + change in accounts payable + change in accrued expenses

Your cash flow statement will calculate this for you. Changes in accounts receivable, accounts payable and accrued expenses are calculated from your balance sheet.

Operating cash flow

What it is: The comings and goings of cash related to your core business. Using a bakery as an example, it takes into account:

  • operating income, eg from selling baked goods
  • accounts receivable, eg sales made on credit to local cafes
  • accounts payable, eg money the bakery owes in the near-future
  • accrued expenses, eg money owed for a bulk flour order
  • depreciation on equipment used to earn this income, eg a commercial oven.

Why it’s useful: Operating cash flow shows if you are earning enough to cover your operating costs — plus cover employees’ wages and pay any lenders or investors.

To work it out: It’s a line item on your cash flow statement, so it’s calculated for you.

What’s good, what’s not: Positive operating cash flow shows your business can cover its costs. The next step is to check your ability to turn any extra cash into profit.

Negative operating cash flow means your earnings can only pay for a portion of your operating costs. Not only does this mean no profits, you must find other ways to cover costs, eg borrowing money.

How to improve: Here are some solutions to common problems — it’s a good idea to talk to your accountant or advisor about which apply to your business.

Look first at how promptly customers pay money they owe you. If they pay on time and in full, that’s great. If they don’t, improve your invoicing process. A good first step is to set shorter due dates — otherwise people forget to pay, and forget what you did for them.

One way to improve cash flow is shorter due dates for customers, and longer terms of trade with suppliers and creditors. This means you can pay them once customers have paid you.

Also make sure you track all costs for each job or sale. This helps you see if the budget is on track and if you costed the job correctly. For example, a house painter should include the cost of hiring extra equipment in April for a job starting in May.

Next think about operating costs. Many small businesses mistakenly think cutting costs means slashing wages or switching to cheap raw materials. But there are many other ways to reduce costs, including:

  • Compare prices for electricity and phone providers — many offer discounts or extras if you switch.
  • If you use vehicles or expensive equipment, does leasing free up cash flow?
  • If you rent your premises, ask for a rent reduction if you plan to stay put — landlords like stable tenancies.

Explore how to improve sales of your product or service. This might mean more marketing, more staff, or changing your prices.

It’s a good idea to check your prices each year to see if these are still in line with:

  • your costs
  • what your competitors charge
  • what customers are happy to pay.
Case study

Case study

Anika the clothing designer

Equation: gross profit margin

Anika uses special fastenings made in Australia. They are expensive, so her profit margin is slimmer than she’d like.

She wonders if it makes financial sense to switch to cheaper fastenings made in India. She knows it will bring down her cost of goods sold, but wants to know if it’s worth making this change — especially as paying upfront and in bulk for the fastenings means being in negative cash flow for several months.

She calculates her gross profit margins using:

  • current cost of goods sold with the Australian-made fastenings
  • reduced cost of goods sold by switching to cheaper fastenings.

The margin improves if she makes the switch. It’s a straightforward calculation as she doesn’t plan to make any other changes to her business operations.

Anika already knows switching to Indian fastenings will put her into negative cash flow as she waits for the shipment to arrive. See how she weighed up the pros and cons of negative cash flow on our financial statements page.

Follow Anika as she uses forecasting to decide if her expected costs and sales make it worth dipping into negative cash flow for part of each year.

Gross profit margin = gross profit ÷ sales

Gross profit margin = gross profit ÷ sales

These numbers are on your income statement.

Gross profit margin and contribution margin

What these are: Gross profit margin is for your business as a whole and shows if it earns enough to cover all expenses — and make money.

Contribution margin breaks this down for a specific income stream, eg a popular product line, or outlet A vs outlet B. It shows if it earns enough to cover its variable costs and contribute to fixed costs, eg rent. For example, a bakery keen to expand could use it to compare how sales to walk-in customers vs supplying local cafes contribute to operating costs — see our case study about Dani the baker below.

Why these are useful: Both show how much you spend to make your products or services.

As contribution margin breaks this down for each product line, service or location, you can use it to see which are worth extra effort, eg a marketing campaign or launch in a new market, and which are a drain on your finances.

A product or service doesn’t have to earn a huge profit to make a difference. If it can cover its own costs, and help pay your operating expenses, it is earning its keep. Think first about how you’ll make up the shortfall before you get rid of a low-profit product or service.

To work it out: Both are typically shown as a percentage.

For gross profit margin, you can set up an equation using line items in your income statement.

For contribution margin, make sure your income statement separates fixed costs and variable costs for the products, services or locations you want to analyse. Then set up an equation in your accounting software or spreadsheet — or get your financial advisor to work it out.

What’s good, what’s not: For both, a positive percentage — or even one close to zero — shows earnings are enough to cover cost of goods sold and contribute to operating costs.

A percentage below zero means costs outweigh earnings — you must act fast to stop losing money.

For gross profit margin, check the average (or benchmark) for your industry. Ask your accountant or advisor about data to compare your business with others like it.

How to improve: Ways to boost your margins include:

  • raising prices, if customers are willing to pay more
  • cutting costs, eg agree new terms with regular suppliers or look for cheaper alternatives.


Contribution margin =  sales - all variable costs

Contribution margin = sales - all variable costs

Contribution Margin ratio = (sales - all variable costs) ÷ sales

These numbers are on your income statement — make sure the statement separates earnings and cost of goods sold for what you want to analyse.

Case study

Case study

Dani's profits

Equation: contribution margin

Dani has taken over her parents’ bakery and is keen to expand — either by opening another store, or by baking for more cafés and restaurants.

She wants to know if the bakery makes more money from walk-in sales, or sales to other businesses. She and her accountant break down her income statements to separate the variable costs from fixed costs and show the difference in costs and earnings.

They then look at the contribution margin — which shows if something earns enough to cover its variable costs and help pay fixed costs — for both income streams.

Selling to other businesses has a better contribution margin, so Dani decides this is where to focus her efforts. She’ll also continue to offer walk-in sales. The contribution margin is smaller for walk-in sales, but it allows her to buy ingredients in bulk to bake for her business customers.

Dani wouldn’t have thought of expanding in this way if she hadn’t set time aside to understand the bakery’s financial statements. Her parents had $15,000 in goodwill on the balance sheet, due to informal agreements to sell doughnuts to local cafes. See how she turned most of this goodwill into $13,000 worth of supply agreements — an asset more attractive to lenders and investors — on our financial statements page.

Case study: Dani’s goodwill

Follow Dani’s story as she uses forecasting to set a budget for a new commercial kitchen to handle increased demand.

Case study: Dani’s financial model

Debt to assets ratio = all liabilities ÷ all assets

Debt to assets ratio = all liabilities ÷ all assets

These numbers are on your balance sheet.

Debt to assets ratio and current ratio

What these are: Debt to assets ratio looks at all your business’s debts (also called its liabilities) and all its assets.

Current ratio, also called working capital ratio, shows if your business has the ability to pay off its short-term debts using its short-term assets, eg cash, inventory and accounts receivable. It’s to do with paying off your debts due within a year. These are called current liabilities on your balance sheet and include:

  • rent or mortgage payments
  • money owed to suppliers
  • short-term loans and credit cards
  • holiday pay
  • income tax.

Why they are useful: Debt to assets ratio shows how robust — or vulnerable — your business is. Banks in particular will look at this ratio when deciding how much to lend you. Banks may also set a ratio band you must stay within for the term of the loan.

Current ratio shows how your bills will be paid if your business doesn’t earn enough money. If you can’t pay what you owe, your lender or investor can sell your short-term assets to make up the shortfall. Some industries have benchmarks for this ratio so you can check how you compare to similar businesses. Talk to your advisor about benchmarking.

To work it out: Debt to assets is your total liabilities divided by your total assets.

For current ratio, you can set up this equation in your accounting software or spreadsheet — or get your financial advisor to work it out.

What’s good, what’s not: For both ratios, a result higher than 1.0 shows your assets are worth more than enough to cover your debts. This makes you a safer bet for lenders and investors. Most importantly, it means your business model is on track.

If it’s below 1.0, this is a red flag — you need to fix it, and fast. For lenders and investors, you’re seen as a riskier prospect.

But it also depends on what types of current assets you have. Cash is good for you and your business. Investors and lenders also like cash, or assets that can easily be sold for cash, eg items from your most popular product line.

How to improve: Here are some solutions to common problems — it’s a good idea to talk to your accountant or advisor about which apply to your business.

For current ratio, delve into the assets column on your balance sheet.

If most of it is accounts receivable — money owed by customers paying on credit — check if most pay promptly, or if many take a long time to pay in full. Many businesses get into financial trouble by not staying on top of their accounts receivable. Offering credit can build goodwill, but make sure payment terms are fair to both you and your customer.

Go back over your stocktake figures. Inventory is a current asset, but if it takes too long to sell — or you buy too much at a time — it makes it harder to pay your debts. Paying for inventory before you sell it costs you money, so consider longer payment terms with suppliers — or items you can sell faster.

Also check the liabilities column. If you’re carrying a lot of credit card debt, it’s worth switching this to a loan with a lower interest rate.

Explore how to improve sales. This might mean more marketing or changing your prices.

For debt to assets ratio, look into leasing vs buying key pieces of equipment. Weigh up costs and other pros and cons. Leased equipment is classed as an operating expense, not a liability, and it’s tax deductible. If you buy it, you own an asset used to make money for your business.

Current ratio = all current assets ÷ all current liabilities

Current ratio = all current assets ÷ all current liabilities

These numbers are on your balance sheet.

Quick ratio

What it is: An equation that shows if your business can pay its short-term debts — called current liabilities on your balance sheet — from assets that can easily be turned into cash within 90 days, including:

  • dollars and cents in your till or bank account(s)
  • accounts receivable
  • pre-arranged overdraft.

For this ratio, inventory is subtracted as it can take longer than 90 days to turn into cash. Pre-paid expenses can’t easily be turned into cash, so leave these out too.

Why it’s useful: It’s reassuring to know you can easily free up money to pay debts or buy inventory. And if you can’t, you’ll know in advance to make other arrangements, eg take out a loan or agree a payment plan.

To work it out: Do a stocktake, if applicable, as the equation below will use:

  • value of your inventory (zero if you don’t have inventory)
  • total of your current assets
  • total of your current liabilities.

What’s good, what’s not: A quick ratio higher than 1.0 shows you can afford to pay your bills on time and in full, with cash or assets you can easily turn into cash.

If it’s below 1.0, you’ll struggle to repay what you owe without borrowing money, running up credit card debts, or selling assets.

How to improve: Are you often left with more stock than you can sell? Focus on fixing this. The long-term goal is to speed up sales — review your prices and marketing. In the short-term, you might need to:

  • buy or make less at a time
  • discount your prices, eg at day’s end for a bakery, an end-of-season sale for a designer.

Review your assets. Sell any you rarely use to free up cash, eg old machinery or equipment.

Avoid paying high interest on credit cards by paying it off on time and in full each month. If you can’t, find a cheaper way to use your bank’s money, eg an overdraft or loan. Investors are unlikely to give you money if it’s solely to cover debts — they want their money to help a business improve and grow. You’re better off borrowing money. Talk to your bank about restructuring your debts, and perhaps paying interest only on a loan.

If your business earns enough to have a lot of extra cash waiting for the right time to use it, look into high-interest accounts. Use our modelling tool to see if it’s a better option than using that spare cash for something else.

Quick ratio = (all current assets – inventory) ÷ all current liabilities

Quick ratio = (all current assets – inventory) ÷ all current liabilities

Assets and liabilities are on your balance sheet. Inventory should also be on your balance sheet — make sure it has its own line item.

Other equations

Depending on your industry or business size, there are other equations used to analyse performance. These include:

  • Inventory turnover — the number of times stock is sold and replaced in a year.
  • Return on assets — measures a business’s ability to make money from its assets, and typically only useful for banks.
  • Return on equity — measures a business’s ability to turn an investor’s money into profit.

If any of these apply to your business, it’s best to talk to your accountant or advisor about how your results compare to others in your industry.

If you have one, also talk to your board of directors or investor(s) about ways to improve. They will be keen to share their knowledge and insights.

Inventory turnover = cost of goods sold ÷ average stock held

Inventory turnover = cost of goods sold ÷ average stock held

Average stock held = opening inventory + closing inventory ÷ 2

Cost of goods sold is on your income statement. Inventory levels should be on your balance sheet.

Compare your business to others

Various benchmarking tools are available. Check with your accountant — many can run the numbers for you as they subscribe to paid services, eg RANQX and the University of Waikato’s benchmarking survey.

If ratios are given for your industry, note that these figures for New Zealand businesses often fall below global best practice. But it’s still a handy way to work out if your numbers are low or high.

In a simpler context, cost of goods sold usually contains the variable costs as they change depending on how much you make or do. On the other hand, operating expenses are often fixed costs.

In a simpler context, cost of goods sold usually contains the variable costs as they change depending on how much you make or do. On the other hand, operating expenses are often fixed costs.

It can be tricky to work out if some costs are variable or fixed, so get expert advice.

Five-step game plan

Five-step game plan

  1. Pick an equation — or equations — from this page.
  2. Gather the raw data from your financial statements and, if relevant, benchmark figures for your industry.
  3. Run the numbers.
  4. Decide what you might need to do to improve the result.
  5. Track your progress. Repeat steps 2 and 3 at regular intervals, eg monthly. Add step 4 when you need to.
Don’t look at equations and ratios without checking benchmark figures for your business type or industry.

Don’t look at equations and ratios without checking benchmark figures for your business type or industry.

You might jump to the wrong conclusions.

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