Two important accounting ratios every business owner should understand are debtor days and gross profit margin.

Together, these figures help you understand how efficiently your business is operating, how quickly money is coming in and whether your direct costs are affecting profitability.

In the video above, Paul explains why these two accounting ratios are worth monitoring and how they can reveal things about your business that might otherwise go unnoticed. The first, debtor days, measures the average time it takes your customers to pay you. The second, gross profit margin, shows how much of your turnover remains after accounting for direct costs such as materials, labour, equipment and subcontractors.

One of the most common surprises for business owners is discovering that their customers take considerably longer to pay than they realise. You might believe everyone is sticking to your 30-day payment terms, but a quick look at the relevant report in Xero can tell a very different story. The longer customers take to pay, the more money is sitting in their bank accounts rather than yours, potentially putting unnecessary pressure on cash flow.

Gross profit margin provides another important perspective. By understanding what percentage of your turnover remains after direct costs, you can assess how efficiently your business is delivering its products or services and identify opportunities to improve profitability.

Regularly reviewing these ratios gives you a clearer understanding of your financial performance and helps you identify where relatively small improvements could make a meaningful difference to your business.

Got more questions about Xero and your business finances?

This is just one of 100+ practical questions we recommend business owners ask, covering Xero, accounting, tax, cash flow, business planning and the financial questions that crop up when you’re running a business.

Download the complete collection of 100+ questions below.