Monday, May 5, 2008

Financial well-being.

Financial well-being

IS YOUR startup spending unwisely, taking on orders it cannot execute or sitting on underutilised assets? Monitor the following ten parameters continuously to ensure the financial health of your company.

1. What are your assets?

Yes, yes, we all know that assets are the things that a business owns. 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 located on a piece of land that’s worth more than the business itself. Similarly, you also will want to track the declining value of assets such as computers and office furniture.

2. What are your liabilities?

Again, on the face of it, this is easy — liabilities are what you owe. But what you owe isn’t always as obvious as a bill from your landlord. Payroll taxes are a liability that you might be able to put off on a monthly or quarterly basis, depending on the size of your payroll. Loans are a clear liability, but in repaying them you’ll want to be able to track how much of a payment is applied against principal and interest.

3. What’s it costing you to produce what you sell?

If you’re buying a finished item for resale, this is relatively easy. It’s trickier if you have to calculate all the factors, such as labour, that go into manufacturing a product.

4. What’s it costing you to sell what you sell?

Advertising, marketing, labour, storage and the catchall category of overhead — it’s useful to know how much it costs you getting a product out the door as well as what it costs you in creating it.

5. What’s your gross profit margin?

This is calculated by dividing your total sales into your gross profit. If your gross profit margin is staying consistent or trending upward, you’re probably on track in terms of adjusting your prices appropriately to reflect changes in what you pay for what you sell or produce. Being able to track a declining margin can give you a headsup that you must adjust your prices or your costs. In the worst cases, of course, your gross profit and your profit margin disappear altogether. At that point, you’ll be like the fellow who lost money on every sale but figured he could make it up in volume. Don’t go there.

6. What’s your debt-to-asset ratio?

This ratio can let you know how much of the stuff you have in your company is actually owned by someone else — your lender. Having this ratio climb can be a bad sign — it can happen as part of a major expansion, but it can also indicate that you’re getting in over your head.

7. What’s the value of your accounts receivable?

This is the money that you are owed. Value of being able to track it: If accounts receivable are on the rise, you may be getting a warning that the folks you sell to are starting to stumble. That’s especially true if your accounts receivable, as a percentage of total sales, are increasing.

8. What’s your average collection time on accounts receivable?

This is probably one of the most aggravating pieces of information for cashstrapped businesses, because it tells you how many days you’re acting as “banker” for the people who owe you money. To calculate it, you’ll need to know your average daily sales and then divide that number into your accounts receivable.

9. What are your accounts payable?

The flip side of accounts receivable. An increase in your accounts payable may merely reflect a policy of taking a little longer to pay bills, or of a larger amount of purchases overall. But an increase that hasn’t been planned or managed can be an internal warning that your company’s financial strength is waning.

10. What’s happening with your inventory?

There are occasions, even in this just-in-time business world, when building up a significant inventory can be a good thing. If prices for items you sell or use in production are relatively low, putting some of your money into inventory may make sense. Being able to track your inventory, and how long it takes to be sold or turn over, can tell you whether business is increasing or slowing down. It also tells you how much money that might be used for other payments or investments is tied up in this unproductive asset.

(Adapted from Microsoft’s Small Business Centre website)

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