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For a business owner, there is never enough time. As a result, some things are easy to avoid – such as financial analysis.
Unfortunately, this can be a big mistake, especially in the current recessionary environment. In a way, success requires some level of CFO skills.
So, what can you do? Here' are some tips:
Profits: Monitor trends in gross profit margins (gross profits divided by sales) and operating margins (earnings before interest/taxes divided by sales). Measure these against your industry peers as well as your company's historical performance (often, you can get industry ratios from a trade association). If you see deterioration, then you need to be concerned. For example, your pricing may be too high or your costs are growing too much.
Liquidity: Keep track of the current ratio (current assets divided by current liabilities). This gives you a quick idea if there is enough cash to pay your bills. "If your current ratio drops below 1, then this is a red flag," said Joe Knight, who is the co-owner of the Business Literacy Institute and co-author of Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean
Accounts Receivables (A/R): Watch this carefully. "If A/R is 30% of your income, is there a good reason why you're carrying your customers?" said Madeline Bailey, who is the author of Radical Accounting: A Way Out of the Dark and Into the Profit
Operating Ratios: These show the level of efficiency with your operation. One critical ratio is the Days Sales Outstanding, which shows how long it takes to collect on receivables. "If the DSO is more than 60, this is a concern," said David Kirkup, who is a partner at B2B CFO.
PS: BizEquity is going to launch a new valuation engine (for small businesses), which has a Turbo-tax style input and a 22-page report. If interested in checking out the beta, let me know via email.
Tom Taulli is the author of various books, including The Complete M&A Handbook
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Reader Comments (Page 1 of 1)
3-23-2009 @ 1:04AM
Aarti said...
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3-23-2009 @ 1:07AM
Aarti said...
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3-30-2009 @ 6:09PM
Melissa said...
All the resources I can get is awesome. Have you also tried looking at “The Ultimate Practice Building Book,” by David Zahaluk? It is a prescription for financial (and emotional) health for modern private practices? It really helped me to clarify and differentiate my practice from a marketing standpoint. It's amazing!
http://www.ultimatepracticebuilder.com/