Use Profit Ratios to Improve FBO Bottom Line (Part II)

Multi-Part Series on The 7 Immutable Elements of Building Equity in Your FBO Enterprise

As a continuation of our blog post regarding the value of creating a sound balance sheet with consistent EBITDA performance, we pick back up with the importance of conducting a financial ratio analysis which helps spot trends, whether good or bad.

In a previous blog post, we discussed calculating Liquidity Ratios as a tool to help FBOs meet current obligations in a timely manner. For this blog post, we’ll evaluate the use of calculating Profitability Ratios as a measure of the enterprise’s ability to generate revenue, net income and an acceptable return on investment.  

Chart Source: WallStreetmojo

For FBOs, calculating profitability ratios is important in understanding how the enterprise is performing financially. This is done by calculating profitability at various levels to include gross profit, profit after tax and EBITDA. If an FBO owner/operator is seeking to sell the business, these calculations will be important in generating interest from potential buyers. If the FBO is part of a network that may involve shareholders, an understanding of profitability ratios is key to evaluating management performance.

The Gross Profit Margin Ratio is calculated by deducting the Sales Revenue from the Cost of Goods Sold and dividing it by Revenue. The Cost of Goods Sold should include Labor Expense. The following is the formula to calculate this ratio:

 ·        Gross Profit Margin Ratio = (Revenue - Cost of Goods Sold) ÷ Revenue

Net Profit Margin Ratio is calculated by deducting all the Direct and Indirect expenses from the Sales Revenue (PAT) and dividing them by Sales Revenue.

 ·        Net Profit Margin Ratio = PAT ÷ Revenue

This ratio tells us the profitability of your business. For example, if you have $75,000 in equity and have net sales of $300,000, your net profit would be .17%. This means that you are earning 17 cents for every dollar your company spends -- a particularly good return for most businesses.

EBITDA Margin Ratio is calculated by adding Interest, Taxes Depreciation and Amortization expenses to Net Profit and dividing the resulting EBITDA by Sale Revenue.

·        EBITDA Margin = PAT + Interest + Taxes + Dep & Amort ÷ Revenue

These three profitability ratios are a good starting point. However, understand that there are other financial indicators that should be reviewed on a regular basis. For example, calculating Return on Investment (ROI) is important.

A review of financial ratios within your enterprise can be helpful in developing budgets and targeting areas for potential improvement. It is also recommended that FBOs gain a feel for where they stand in the industry and comparing data to other companies in the same industry is one way to measure performance.

However, when using comparison data, keep in mind that it is possible to manipulate data as different companies also have various methods of displaying data and ratios cannot assist in forecasting the future.

Note: In developing this blog post, the book, Small Business Advisor, All You Need to Know, by Andi Axman, was used as a reference as well as WallStreetMojo

In our next blog post, we will discuss Advancing a Durable Airport Minimum Standards document as a major component of The 7 Immutable Elements of Building Equity in Your FBO Enterprise.

ABOUT THE WRITERS: John Enticknap (404-867-5518) has more than 35 years of aviation fueling and FBO services industry experience and is an IS-BAH Accredited auditor. Ron Jackson (972-979-6566) is co-founder of Aviation Business Strategies Group (ABSG) and president of The Jackson Group, a PR agency specializing in FBO marketing and customer service training.© 2024 ABSG

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