FBO Insight: Use Financial Ratios to Help Improve Your Bottom Line

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

A handy tool for FBOs to help manage profitability is to conduct a financial ratio analysis which will assist in spotting trends, both good and bad. This process will aid owners and operators to get a better grip on cash management and forecasting the effect that operations have on the bottom line.

There are two groups of financial ratios that should be viewed and understood to evaluate an FBO business: liquidity ratios and profitability ratios.

Liquidity Ratios. This group indicates an FBOs ability to meet current obligations on time. An FBO with liquidity problems often has trouble paying its bills and needs either more capital or better management, or perhaps both.
Profitability Ratios. This is a measure of management’s performance regarding the ability of the business to generate revenues, net income and acceptable return on investment.

For this blog post, we will breakdown the liquidity ratios group. Within this group is the current ratio analysis which is the most common ratio to review. To arrive at the current ratio, divide current assets by current liabilities.

This provides a measure of the FBO enterprise’s ability to meet current debt. As a rule of thumb, the ratio should be no less than 2-to-1, where current assets are twice current liabilities. Keep in mind current assets, such as inventory, take time to turn into cash. In addition, if receivables are old and uncollectable, the ratio would not be accurate.

If the current ratio seems to be too low, take action to increase assets, such as raising capital through equity or debt financing, and/or decrease liabilities. If you borrow money, make sure that the term is more than a year in the future. Review all options to make sure the current ratio is acceptable.

Another ratio to review is the quick ratio, often referred to as the “acid test.” It measures the company’s ability to meet current obligations. To calculate quick ratio, add up all liquid assets, cash on hand, securities and receivables, then divide these assets by current liabilities. Again, for most businesses, a quick ratio of 2-to-1 is sufficient.

Also measure accounts receivables and calculate days outstanding. Are accounts receivables within desired credit terms?

An easy calculation to determine average sales per day might look like this:

Annual Sales: $2,500,000 = $6,850 Average Sales per day

365

Accounts Receivable: $150,000 = 21.9 days

$6,850

In this example, the average collection period is 22 days. If credit terms are 30 days, you are in good shape. On the other hand, if this analysis shows the average collection period to be 50 days, there is a need to take action to collect receivables.

One last ratio to review is inventory turnover. This would generally apply to an aircraft maintenance business. Aircraft parts can be extremely expensive. On the other hand, fuel inventory should move quickly with a window of seven to 10 days in storage tanks and then into-plane. The seven to 10 days depends on a number of factors while keeping in mind not to advance credit on retail or contract sales.

For many aircraft maintenance operators, parts inventories can add up to a substantial amount if not monitored carefully. A savvy trend is to only inventory consumable parts, such as brake parts, tires, oil and filters, and rely on just-in-time delivery for more costly airframe specific parts. These types of management techniques can help keep your cash flow positive.

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

In our next blog post, we will look at profitability ratios, a key to help manage an FBOs’ performance.

Please leave any comments you have about this blog post below. If you have any questions, please send us an email: John Enticknap, jenticknap@bellsouth.net, Ron Jackson, ronjacksongroup@gmail.com,

ABOUT THE BLOGGERS: 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.

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