• Cash flow: Cash flow is the net balance of cash moving in and out of a business at any given time. If it’s positive, more money is flowing in than out. If it’s negative, more money is flowing out than in.

• Profit: Profit is the money that remains when all of a business’s operating expenses have been subtracted from its revenues. 
• Gross profit is revenue less the cost of goods sold.
• Net profit is the net income after expenses such as tax and interest payments have been deducted from all revenues. 
• Operating profit, or earnings before interest and tax (EBIT), refers only to the net profit generated from the core business.
• Break-even: This is the point where your total revenue equals your total costs so there is neither profit nor loss.
• Earnings before interest, taxes, depreciation and amortisation (EBITDA): This is a measure of profitability – though it can be misleading because it doesn’t include the cost of capital items such as  property, plant, and equipment.

• Gross profit ratio: Calculated by dividing gross profit by sales, this is a measure of the gross profit margin on each dollar of sales. The gross margin needs to be large enough to cover operating costs and produce an acceptable level of profit.

• Current ratio: A measure of liquidity calculated by dividing current assets by current liabilities, this shows whether the business has sufficient current assets to meet its short-term liabilities as they fall due. The higher the ratio, the more likely this is to be the case.

• Debtor days: Also called the average collection period for receivables, this is a measure of how efficiently management is controlling customer credit. It is calculated by dividing debtors by sales then multiplying this by the number of days in the period under review.

• Return on investment: Measuring the after-tax return on assets employed in the business, this provides a snapshot of performance.  It’s calculated by dividing net profit after tax by net assets.

• Inventory days: The faster stock is sold, the faster it’s converted into cash. Inventory divided by cost of goods sold and multiplied by 365 shows the average number of days that inventory is held before it is sold.

• Working capital position: This is the difference between current assets and liabilities – the money available when all money owed to you has been paid and you are up to date with all of your payments.

• Asset turnover: This compares the value of a business’s sales revenue with the value of its assets – a useful insight into how efficiently the business is using assets to generate revenue.

•  Depreciation: When a business asset loses value over time it is said to depreciate. Depreciation is a way for accountants to measure and record this loss in value.

What danger signs should you look out for?

Here are three signs that suggest a franchise is struggling.

• Business Activity Statements aren’t lodged on time.
• Super payments are either too low or late.
• Suppliers aren’t being paid on time, putting relationships at risk.