Measuring the Financial Health of Your Small Business
Time and again small businesses advisors say their clients don’t pay enough attention to their financial metrics. So, how is this a problem and what can you, a business owner or senior manager, do about it?
Financial health can be tracked by paying attention to the following:
• Assets – Tracking your equipment, furniture, real estate and other holdings should be easy. But to have a true idea of the value of your business, you also have to track changes in the value of those assets. More than one small business has found itself loaded with assets (such as computers and office furniture) worth more than the business itself.
• Liabilities – On the face of it, this is easy – liabilities are what you owe but what you owe isn’t always as obvious as totaling your monthly bills. Liabilities include payroll taxes and all that go along with them like state taxes, social security, Medicare and unemployment taxes.
• Costs of Goods Sold – If you’re buying finished items for resale, calculating the cost of goods sold is relatively easy. However, advertising, marketing, labor, storage and all the overhead and indirect costs not strictly allocated to production. In a manufacturing environment where labor and inventory become major factors.
• Gross Profit Margin – Calculated by dividing gross profit by total sales. If your gross profit is staying consistent or trending upward, you’re probably on track. On the other hand, a declining margin is an indication that you must either increase prices or reduce costs. If both gross profit and profit margin disappear altogether, you’ll be like the dot com, while loosing money on every sale, figured he could make it up in volume.
• Debt-to-Asset Ratio? – This ratio lets you know how much of your company is actually owned by someone else like your lender or investors. It can happen as part of a major expansion, or it can also indicate that you’re getting in over your head.
• Value of Accounts Receivable – This is the money you are owed. A rise in accounts receivable may be a warning that your customers are starting to experience financial difficulties.
• Average Receivables Collection Time – This is probably one of the most aggravating pieces of information for cash-strapped businesses, because it tells you how many days you’re acting as ‘banker’ for the people who owe you money.
• Accounts Payable – The flip side of accounts receivable is the accounts payable, what you owe your creditors. An increase in your accounts payable may simply reflect a larger amount of purchases to accommodate a growing business. Unfortunately, an unplanned or unmanaged increase can be an internal warning that your financial strength is waning.
