Health Check: Measure Profitability

Here’s the last set of ratios I will discuss in this series on conducting a health check of your company: Profitability ratios. There are various other types of ratios that we have not discussed here that you can also perform, if applicable to your business.

Now let’s look at “Profitability Ratios”.

What does it mean:
Profitability ratios provide a measure of how successful your travel business is in terms of generating commissions relative to sales or resources invested in the business.

Commission Margin Ratio (a.k.a. Gross Margin Ratio) measures how much commission your business is earning relative to the total gross sales of your business.

Commission Margin Ratio = Commission Earned / Gross Sales
(This information is available directly through the Sales Activity report in the Merang TravelOffice system – back-office module)

While this ratio gives you an indication of how much commission (on average across all suppliers) you are earning for each dollar of gross sales you make, it may also indicate how much of a discount you are providing. For example, if on average you earn 8% commission based on your agreements with suppliers, but you find that your commission margin ratio is only 5%, it indicates that you are on average giving a 3% discount on your sales. If in the following year, your ratio goes down to 2%, it indicates that you were forced to increase the amount of discounts – this could have been due to increased competition pressuring you to reduce your commissions even further, or perhaps suppliers are reducing their commission rates. If possible, try to set a target for your ratio, and creatively identify ways of meeting or exceeding this target.

Return on Assets measures how effectively your assets are being utilized to generate profits.

Return on Assets = Net Income / Total Assets

Return on Equity measures the profit earned for each dollar invested into the business by shareholders.

Return on Equity = Net Income / Shareholders Equity

As mentioned, there are various types of ratio analysis that can be performed. In this series, I’ve only focused on those that I felt are more applicable to the small to mid-size travel businesses. Feel free to google this topic on finanical ratios to learn about other types of ratios that we have not covered here.

Also, while these measures are useful in giving your business an overall health check, they do have limitations. As discussed in my last post, you should compare your results to historical values, industry-averages, and/or targets you have set. Factors of your specific business may result in the ratios not being meaningful, and so you should be cautious. But overall, these measures will probably provide a benefit to you and should be used to measure the health of your business on an ongoing basis.