1. COGS to sale ratio What it shows:
How much of every dollar earned is spent directly on producing your product or delivering your service.
Formula:
COGS ÷Sales
Why it matters:
A rising COGS ratio can signal pricing issues, supplier cost increases, or inefficiencies in production or service delivery.
2. Operating Expense to Sales Ratio
What it shows:
How much of your revenue goes toward running the business (admin, marketing, rent, etc.)
Formula:
Operating Expenses ÷ Sales
Why it matters:
This ratio helps you understand whether overhead is scaling appropriately as the business grows.
3. Gross Profit Margin
What it shows:
How much profit you keep after covering direct costs.
Formula:
(Sales – COGS) ÷ Sales
Why it matters:
This is a core indicator of pricing strength, cost control, and overall business model health.
4. Net Profit Margin
What it shows:
The percentage of revenue that becomes true profit after all expenses.
Formula:
Net Income ÷ Sales
Why it matters:
This is your bottom-line profitability – the clearest measure of financial success.
Cash Flow & Efficiency Ratios
These ratios measure how quickly money moves in and out of the business. They rely on average balances from your Balance Sheet.
5. Accounts payable turnover (AP Turn)
What it shows:
How quickly you pay your vendors.
Formula:
COGS ÷ Average Accounts Payable
Why it matters:
A low AP turnover may indicate cash flow strain or slow payment habits; a high turnover means you’re paying vendors quickly.
6. Accounts receivable turnover (AR Turn)
What it shows:
How quickly customers pay you.
Formula:
Sales ÷ Average Accounts Receivable
Why it matters:
A low AR turnover can signal collection issues or overly generous payment terms.
7. Inventory Turnover
What it shows:
How many times you sell through your inventory in a period.
Formula:
COGS ÷ Average Inventory
Why it matters:
Low turnover may indicate overstocking or slow-moving products; high turnover suggests efficient inventory management.
8. Inventory Days on Hand (DOH)
What it shows:
How long inventory sits before being sold.
Formula:
365 ÷ Inventory Turnover
Why it matters:
This ratio helps you understand cash tied up in inventory and how quickly it converts into sales.
CFO Advisory Support for Your Business
If this email sparked questions about your numbers, your pricing, or how these equations apply to your business, EVT offers fractional CFO consulting designed for small business owners who want clarity, confidence, and a plan.
Whether you need help modeling scenarios, understanding your true profitability, or building a financial strategy you can actually use, you can schedule a CFO Consult anytime.