Average collection period

February 11th, 2013

The ratio of accounts receivable to average daily sales. Businesses that invoice for services might have an average collection period whereas a retail outlet probably would not.

Current Ratio

February 8th, 2013

Current assets divided by current liabilities. This is a measure of solvency of a business.

Quick Ratio

February 7th, 2013

This ratio measure short-term solvency. It is the ratio of the most liquid of current assets (usually cash) to current liabilities.

Working Capital Ratio

February 6th, 2013

The ratio of current assets to current liabilities. A company needs a positive working capital ratio to remain solvent.

Return on Sales

February 5th, 2013

Also known as profit margin. The ratio of net income to sales.

Invoicing with Xero

February 4th, 2013

The reason you are in business is to get paid, and hopefully get paid quickly.  Xero makes it very easy to invoice your clients and get paid.

Invoices are very easy to create.  It is not necessary to create the client first, though it is helpful.  The invoice screen looks like this:

You enter who the invoice is to, the date of the invoice and when it is due.  Enter what you are billing for and you are done.  Approve your invoice ans email it to your client.  If you or your Xero advisor has properly set everything up, you will not need to worry about what kind of income it is or what tax rate it belongs to, a boon to those clients that have to file sales tax returns.

If you are a business that sends different invoices depending on what type of client the customer is, you can hard code that information into the client’s record.  In the picture above you can see “Branding.”  You can set the default branding by client so that you never accidentally send out the wrong invoice again.  That particular issue was a big problem for my business and I spent extra time each month ensuring that I had the proper invoice scheduled — and I still sometimes sent the wrong one!

When you connect your PayPal account to Xero, the system will automatically place a payment link in the email you send to your client.  This greatly speeds up payment since your customers no longer need to do anything but click a link in the email they already  have open to pay you.  You no longer need to create an invoice your bookkeeping system and again in PayPal.  In addition, each client can set their own access to their account with you.  They can look back at prior invoices, see a balance due and make payment right online.  This wonderful end of the year accounting when clients often ask for statements.  They can now get the information they want through self service.


Return on Investment

February 4th, 2013

The amount of profit earned by a business that could be paid to the owners/shareholders. This is calculated by profit divided by average investment during the fiscal period.

Return on Equity

February 1st, 2013

Net income divided by stockholder’s equity. This evaluates the return earned based in comparison to investment. It is useful in evaluating the value of the investment to the stockholder.

Return on Assets

January 31st, 2013

The ratio of net income (or operating income) to total assets; net income divided by total assets. This ratio is used to evaluate whether a reasonable return has been earned on the assets in business control. It is one way of evaluating the effectiveness of business practices.

Asset Turnover

January 30th, 2013

The ratio of revenues to total assets. It is a measure of the ability of a company to use its assets to sell its products or services. A company with a high asset turnover is more effective in using its assets than one with a low asset turnover.