Ratios glossary
Performance ratios (6): Cash At Bank, EBITDA, Gross Margin, Gross Profit, Operating Profit and Revenue. In the app: “Your core ratios, tracked month by month...” These often have a one-to-one relationship with fields in your bookkeeping data.
Efficiency ratios (14): the rest. In the app: “How efficiently money moves through your business, compared with your sector”.
Annual Recurring Revenue (ARR)
Annual Recurring Revenue (ARR) is your recurring revenue scaled up to show what it represents over a full year. It’s simply your Monthly Recurring Revenue annualised.
Formula: ARR = MRR × 12
Example: If your MRR is £5,000, your ARR is £60,000 (£5,000 × 12).
Cash At Bank (CAB)
Cash At Bank is the money your business holds across its bank accounts, taken from the latest month in your accounts.
Formula: Cash At Bank = balance of your business bank account(s)
Example: If your business bank account shows £18,500, your Cash At Bank is £18,500.
Cash Conversion Cycle (CCC)
Cash Conversion Cycle (CCC) is the number of days it takes your business to turn spending on stock into cash collected from customers. It combines how long stock sits unsold, how long customers take to pay, and how long you take to pay suppliers.
Formula: CCC = DIO + DSO − DPO
Example: If your DIO is 40 days, your DSO is 30 days, and your DPO is 25 days, your CCC is 45 days (40 + 30 − 25).
Note: DIO, DSO and DPO each use the two-month average described in their entries. Assumes your business holds stock. If you’re a service or software business, this ratio may not apply to you.
Cash Ratio (CaR)
The Cash Ratio is a strict measure of whether you could pay off your short-term debts using only cash and cash-like assets, without waiting to collect anything else in.
Formula: Cash Ratio = (Total Cash + Cash Equivalents) ÷ Total Current Liabilities
Example: If you hold £20,000 in cash and no cash equivalents, against £15,000 of current liabilities, your Cash Ratio is 1.33 (£20,000 ÷ £15,000).
Note: Cash equivalents are optional when you create the ratio.
Cash Runway (CRW)
Cash Runway is the number of months your business can keep operating at its current spending rate before it runs out of money.
Formula: Cash Runway = Cash At Bank ÷ Net Burn Rate
Example: If you hold £50,000 in cash and your Net Burn Rate is £10,000 a month, your Cash Runway is 5 months (£50,000 ÷ £10,000).
Note: Net Burn Rate includes your cost of sales (see below). If your income is higher than your costs, there is no burn to measure, so the tile may show Cashflow Positive rather than a number of months.
Current Ratio (CR)
The Current Ratio measures whether your business has enough short-term assets to cover its short-term debts, which is a simple check on your ability to pay what you owe in the near future.
Formula: Current Ratio = Total Current Assets ÷ Total Current Liabilities
Example: If your current assets are £30,000 and your current liabilities are £20,000, your Current Ratio is 1.5 (£30,000 ÷ £20,000).
Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is the average amount it costs your business to win one new customer, based on your sales and marketing spend.
Formula: CAC = (Cost of Sales + Cost of Marketing) ÷ Number of New Customers
Example: If you spent £4,000 on cost of sales and £2,000 on marketing in a month, and won 30 new customers, your CAC is £200 (£6,000 ÷ 30).
Note: Calculated from the start of your accounts up to a maximum of 12 months. Cost of marketing is optional when you create the ratio.
Days Inventory Outstanding (DIO)
Days Inventory Outstanding (DIO) is the average number of days it takes your business to sell through the stock it holds.
Formula: DIO = (average of this month’s and last month’s Stock ÷ Cost of Sales for the month) × days in the month
Example: If your stock was £7,000 last month and £9,000 this month, the average is £8,000. With a cost of sales of £6,000 for the month, your DIO is 40 days (£8,000 ÷ £6,000 × 30).
Note: sherloc averages this month’s and last month’s stock balance, divides it by this month’s cost of sales, then multiplies by the number of days in the month. Most relevant if your business holds physical inventory.
Days Payable Outstanding (DPO)
Days Payable Outstanding (DPO) is the average number of days your business takes to pay its suppliers. A longer number means you’re holding onto cash for longer before paying bills.
Formula: DPO = (average of this month’s and last month’s Creditors ÷ Cost of Sales for the month) × days in the month
Example: If your creditors were £4,500 last month and £5,500 this month, the average is £5,000. With a cost of sales of £6,000 for the month, your DPO is 25 days (£5,000 ÷ £6,000 × 30).
Note: sherloc averages this month’s and last month’s creditors balance, divides it by this month’s cost of sales, then multiplies by the number of days in the month.
Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) is the average number of days it takes your business to collect payment after a sale is made. A lower number means customers are paying you faster.
Formula: DSO = (average of this month’s and last month’s Debtors ÷ Revenue for the month) × days in the month
Example: If your debtors were £3,500 last month and £4,500 this month, the average is £4,000. With revenue of £8,000 for the month, your DSO is 15 days (£4,000 ÷ £8,000 × 30).
Note: sherloc averages this month’s and last month’s debtors balance, divides it by this month’s revenue, then multiplies by the number of days in the month.
EBITDA
EBITDA is your profit before interest, tax, depreciation and amortisation are taken out, which is a way of seeing how your core business is performing before those extra costs. If you don’t track this as its own line, sherloc calculates it for you automatically.
Formula: Suggested formula: EBITDA = Net Profit + Interest + Tax + Depreciation
Example: If your Net Profit is £10,000, and you add back £1,000 interest, £2,000 tax and £3,000 depreciation, your EBITDA is £16,000.
Note: sherloc’s suggested formula adds interest, tax and depreciation back to net profit. It doesn’t include amortisation, so if you amortise anything, check the figure against your accountant’s.
Forecasting Operating Working Capital (FOWC)
Forecasting Operating Working Capital (FOWC) projects your future working capital by combining your current cash position with expected money coming in and going out, so you can see your cash position ahead of time, not just where it stands today.
Formula: FOWC = Cash At Bank + Incomings − Outgoings
Example: If you currently hold £20,000 in cash, expect £15,000 of incomings, and £12,000 of outgoings, your FOWC is £23,000 (£20,000 + £15,000 − £12,000).
Note: You choose the accounts that make up your incomings and outgoings when you create the ratio.
Gross Burn Rate (GBR)
Gross Burn Rate is the total amount your business spends each month, regardless of how much revenue is coming in.
Formula: Gross Burn Rate = Total Costs
Example: If your total costs for the month are £12,000, your Gross Burn Rate is £12,000.
Gross Margin (GPM)
Gross Margin is your gross profit as a percentage of revenue.
Formula: Gross Margin = (Gross Profit ÷ Revenue) × 100
Example: If your Gross Profit is £6,000 and your Revenue is £10,000, your Gross Margin is 60% (£6,000 ÷ £10,000 × 100).
Gross Profit (GP)
Gross Profit is the revenue left after the direct cost of goods sold, before any other running costs are taken out.
Formula: Gross Profit = Revenue − Cost of Sales
Example: If your Revenue is £10,000 and your Cost of Sales is £4,000, your Gross Profit is £6,000.
Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue (MRR) is your recurring revenue normalised into a single monthly figure, which is useful for tracking subscription or repeat-billing growth consistently, month to month.
Formula: MRR = Number of Customers × Average Revenue per Customer
Example: If you have 100 customers paying an average of £50 a month, your MRR is £5,000 (100 × £50).
Net Burn Rate (NBR)
Net Burn Rate is how much cash your business is losing each month after accounting for the revenue coming in, which is a key measure of how fast you’re using up your cash reserves.
Formula: Net Burn Rate = Total Operating Expenses + Total Cost of Sales − Total Income
Example: If your operating expenses are £10,000, your cost of sales is £2,000 and your income is £8,000, your Net Burn Rate is £4,000 (£10,000 + £2,000 − £8,000).
Note: Cost of sales is optional when you create the ratio. If you leave it out, it isn’t added.
Net Profit (NP)
Net Profit is the profit remaining after all expenses, interest and tax have been taken out of your revenue, which is your bottom line.
Formula: Net Profit = the net profit line in your accounts
Example: If your Revenue is £10,000 and your total costs including interest and tax are £9,500, your Net Profit is £500.
Note: When you create this ratio, you choose which line in your accounts is your net profit.
Operating Profit (OP)
Operating Profit is the profit from your core operations, before interest and tax.
Formula: Suggested formula: Operating Profit = Gross Profit + Total Other Income − Total Operating Expenses
Example: If your Gross Profit is £6,000, your Total Other Income is £500 and your Total Operating Expenses are £4,000, your Operating Profit is £2,500 (£6,000 + £500 − £4,000).
Note: Not the same as Net Profit: Net Profit also accounts for interest and tax. When you create this ratio, double-check the line selected is your operating profit specifically, not your net profit.
Revenue (REV)
Revenue is the total income generated from sales, before any costs are taken out.
Formula: Revenue = Total Income from sales
Example: If you sold £10,000 worth of goods or services in a month, your Revenue is £10,000.