Now, make your financial statements work for you. Use the Income Statement and Balance Sheet to do a quick financial health check on your firm. Not many of us in small business have an accounting background.
I have found doing a three-year trend review and ratio analysis of the financials to be productive. Having a percentage of each line item to Net Sales on the Income Statement is
useful and you can analyze trends.
Following are some computations I like to do:
Sales per employee. This gives some idea of how efficient the operation is running. In manufacturing firms, we targeted $140,000 of sales for each employee. Growth companies tend to have the sales return per employee.
Gross profit margin. Any reduction in this number is a concern. This is a good time to check each product line and fix or eliminate products that are low producers or are losing money. Does your bill of materials need updating?
Review customer base. Are you at risk by having one customer too high a part of your sales? A rule of thumb might be no customer over 30% of total sales. How many customers are new and how many customers have you lost this year? Is your company growing? What is your share of your served market? You should be No. 1 or No. 2.
Asset turns — sales divided by assets. Again, an efficiency test. Particular focus on inventory and accounts receivable. Both can be aged to 30-60-90 days on the books.
Keeping these current frees up cash and reduces risk of loss. There are a lot of costs associated with having an inventory. These include: storage space, insurance, damage, obsolescence and the manpower to move the materials in and out. Is your supply chain doing all it can to support you?
Net income to sales. What’s the three-year trend? What should your team do to increase the net income to sales ratio this year? To check your return on assets, you can multiply this percentage by your asset turns. This is the payback for your risks. Is the return high enough?
Administrative Expenses. These have a tendency to creep up. Have you ”shopped” the
big items recently?
Debt to equity. Most like to see this as a two to one or three to one ratio where your equity (investment) is covering at least a third or half of your total debt. If there are owners or shareholders loans to the company, these can be counted as equity. If you have a hiccup in your operation, heavy debt can be a real threat and reduce flexibility to work through these problems.
Aging of accounts payable. Are you up to date on paying your vendors? Again, if there is a bump in the road and cash is short, you really need to work with your suppliers to extend terms. That is tough when you are already slow pay.
These same ratios above can be compared by industry and, in some cases, by your industry association recapping of member’s data. Industry numbers are reported by SIC/NAISIC and are easy to get. Your accountant or accounting firm can help you in this analysis.
Doing the computations highlighted above will provide a quick check on your company’s
financial trends and gives focus to areas that can be improved to increase your profit and provide cash flow to grow your business.
Go figure — SCORE mentors are available to help. Go to www.score.org or give us a call at 218-251-4413.
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SCORE column: Go Figure - Brainerd Dispatch
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