Agriculture Reference
In-Depth Information
a historical context, the percentage change ratio can be used to assess changes in credit
sales volume from one period to another:
(
)
×
Credit Sales for Current Period
/
Credit Sales for Previous
Period
1
00
(15)
=
Percentage Change in Credit Sales
This simple ratio provides a quick indication as to how the proportion of credit sales is
changing over time.
Bad debts as a percentage of credit sales
:
amount of bad debts divided by total accounts
receivable multiplied by 100
. Bad debts are an agribusiness manager's nightmare. When
the agribusiness sells products and then fails to collect the amount of those sales, it is far
worse than not making the sale at all. Not only does the business suffer from the loss in
gross margin, but it also has to chalk up the loss from the cost of the goods or service
sold, plus the aggravation and cost of trying (usually unsuccessfully) to collect the debt.
One simple way to monitor bad debts is the formula:
(16)
(
)
×=
Bad Debts
/
Total Credit Sales
1
00
Bad Debts as a
%
of Cre
dit Sales
This fi gure can be tracked over time and checked regularly to insure it is within prede-
termined bounds.
The cost of bad debts is very serious for many agribusinesses.
Table 10.4
provides a
better understanding of just how seriously this cost affects business profi ts. The tremen-
dous amount of sales increase necessary to offset bad debt loss is vividly demonstrated in
this table. For example, a $5,000 bad debt requires an increase in sales of at least $50,000
at a 10 percent contribution margin on sales just to bring profi ts back to what they were
without the bad debt. The contribution margin for BF&G is 10.36 percent. (The contribu-
tion margin is gross margin less variable costs. This fi gure is discussed further in
Chapter
12.)
Credit sales have to be monitored very carefully or they can quickly consume all the
profi ts a business is generating. Because the stakes are so high, a carefully conceived and
executed credit program is necessary for any agribusiness and its management team.
Wage effi ciency ratio
: labor cost divided by net sales
. A number of effi ciency ratios can be
developed by exploring relationships between costs and sales. These should be unique
and meaningful to the individual business and to the type of industry. In this area,
Table 10.4
Sales increases required to offset bad debt losses
Bad Debt Loss($)
Contribution Margin ($)
5 %
10 %
20 %
(You must increase sales by the amount.)
1,000
5,000
20,000
20,000
100,000
400,000
10,000
50,000
200,000
5,000
25,000
100,000
