Just over ten years ago I got a message from a friend in Malta: an email/web site friend who was doing an MBA and I helped him with his accounting work. The message related to monthly as opposed to annual ratio analysis. Read the message and then take a look at my suggestions, which are still valid ten years later!
Dear Prof. Williamson,
I hope you remember me!!
I was looking at your extremely interesting and informative contribution (on RATIO ANALYSIS) present in the Bized website, however I cannot find one particular answer. Basically, I am looking for a way to set a number of dynamic indicators for my firm which include the Debtors, Creditors and Stock turnover Ratios, however in all the material I consulted, I only found out comparatives from year to year. No comparisons are made from month to month (WITHIN THE SAME YEAR).
When I tried these, I simply ended up with funny results, in view of the fact that the turnover figures DO NOT reflect a full 12 month period.
Am I right, therefore, in assuming that if for instance I am calculating the ratio for period 4 (in the financial year) I need to divide the result by 4?
Credit Sales (up to period 4) £ 825,000
Debtors’ Balance as at end of period 4 = £ 413,500
Hence, Debtors Collection period is £413,500/£825,000 X 365days = 182days (which is clearly unrealistic! However, if I had to divide the 182 days by 4 (ie period 4), the result would change to 46 days (which is much more factual).
Also, in for instance the Dr%, do you agree that rather than using the formula Average Debtors/(Credit Sales/365) I should replace the 365 by the number of days relative to periods 1 to 4 ie 120 days??
Am I right in my logic please?
Thanks in advance for your feedback!
4 Jul 04
Here is my suggested example for K which is followed by a snapshot of the formulas I used.
The following screenshot shows part of the above layout:
Feel free to download the spreadsheet file by clicking here for this exercise: monthly_ratios
I have brought the file up to date a little by adding some sparklines and I know some of you will find it interesting as I am asked this question two or three times a year.