Financial Analysis

There are many important reasons why you need to properly manage your company's financial statements.  For instance, you can understand your cash balances, you can easily identify revenue to expenses, and you can determine your assets versus your liabilities.  These are all very important and critical issues in managing your business. 

Now that you have your financial statements, consider using them as a springboard into FINANCIAL ANALYSIS, by the use of financial ratios.  Simply, financial ratios are a method to help determine the operating performance of your company.  Another very important element of financial ratios, maximizing the most benefit, is to use as a comparative resource.  How are you doing in comparison to your peers, your industry and your local competitor. 

In general terms, ratios can be categorized into 4 distinct groupings:

1. Profitability - profit margin, return on assets, and return on equity.
2. Asset Utilization - receivable turnover, average collection period, inventory turnover, fixed asset turnover, and total asset turnover.
3. Liquidity - current and quick.
4. Debt Utilization - debt to total assets, times interest earned, and fixed charge coverage. 

So...what do these ratios help us determine? 

Profitability ratios provide for us the opportunity to measure how well the company earns an adequate return on your sales, your total assets, and capital used for investing.   

Regarding Asset Utilization ratios helps you measure the speed your company is turning over accounts receivable, inventory and any other related long-term assets on your balance sheet. 

Liquidity ratios are very important, they emphasize the ability to pay off short-term obligations as the come due...

Debt Utilization ratios, help measure the company's overall debt position in comparison to its asset base and earning power.

Most of these ratios are easily calculated, and in fact, there are many websites that have already crafted these formulas, many for free, so all you need to do is gather your financial statement information and start plugging in numbers. 

Here's an easy one...  Profit Margin is your net income divided by your sales.  $200,000/$6,000,000 = 0.03 or 3.33%.  If your industry average was 7% and your company only has a return on the sales dollar of 3.33%, that could be an issue for you to investigate. 

Okay, so I've given you just a very brief introduction to financial analysis using ratios, however, many people say this in itself is a bit of a science, especially how you interpret the results.  I'll post more about that later and I will also include a few quality websites that have spreadsheets with financial ratios. 

Managing Cash

Growing up in a small restaurant business in Southeastern Colorado, a successful business for more than forty years, cash was King!  Every night we made a deposit to our bank, and every morning we checked the balance of our business account to make sure the deposit accurately reflected our balance. 

We did this every time we made a deposit...managing cash was one of the most important activities we did on a daily basis.  We did this every day for forty years.

In today's economy, cash is ever more important, as a business owner you need to stay on top of cash management and ensure you have the proper tools in place for you to be successful in managing your cash. 

Here are a few quick tips to help you manage cash. 

• Create a Budget
• Track your Receivables
• Keep your Invoicing up to-date
• Define your Payment Dates
• Forecast your Cash Flow - use the most recent data and consider seasonal and one-time adjustments.
• Create a simple spreadsheet in Excel
• Use your accounting system, like QuickBooks, to help maintain your cash flow.
• Talk with your Business Banker about a Line of Credit.

Help yourself be successful by using a standardized accounting system, like QuickBooks, integrated with your cash flow projections you prepared in a spreadsheet, and make sure you know the status of your invoices.