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Time
to Take Your Company's Pulse?
by
Brad Ketchum, Jr.
With
midyear 2001 just around the corner, this is a good time to
assess your business's financial health. Here's how to do
it.
As a small-business
owner or manager, which numbers should you be keeping an eye
on — and how often should you check them? Start with these three
items on your income statement:
1.
Sales. Are revenues increasing? If not, is the market
shrinking, or are you not keeping pace?
2.
Operating profit margin (earnings before interest and
taxes, divided by sales). Is your margin better or worse?
If worse, have you let operating expenses such as salaries,
rent, or utilities get out of control?
3.
Interest expense. Is interest eating up your operating
profit? If so, you may have too much debt.
Next,
check your balance sheet and make these three calculations:
4.
Working capital (current assets minus current liabilities).
If this number is negative, you may have trouble paying
your bills.
5.
Current ratio (current assets divided by current liabilities).
This ratio should exceed 1:1. A higher result (2:1 or over)
is even better.
6.
Leverage. Calculate the ratio of total liabilities to
net worth. If this is higher than 3:1, you may be relying
too heavily on debt.
It's best
to check those six basic barometers each time you prepare
or review a set of financial statements. What other hard numbers
should you be monitoring — and how frequently? Here are
10 critical checkpoints:
Weekly
updates —
1. Current
cash position. How much cash was received, when, and from
whom?
2. Cash disbursements. Consider payroll, materials,
and purchasing.
3. New sales.
4. Accounts receivable. Review beginning balances,
outstanding credit, and cash receivables.
5. Accounts-payable payments.
6. Order backlog.
7. Number of employees. Apply a productivity metric
(e.g., sales per employee).
Monthly
updates —
8.
Inventory. Include accounting or physical tests of accuracy.
9. Accounts-receivable average days outstanding. Classify
receivables into brackets of days outstanding — 10, 20,
30, 40, etc. — and relate to your credit terms (e.g.,
net 30).
10. Accounts-payable obligations (with aging breakdown).
Brad
Ketchum, Jr., is editorial director of Inc. Business
Resources.
Copyright
© 2001 Gruner + Jahr USA, Inc. Business Resources
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