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Healthy, Wealthy and Wise
A 5 point self examination of your business
"Early to bed, early to rise; makes a man healthy, wealthy and wise." This may be a true saying, but it is not all you need to achieve the three goals mentioned. In the past couple of years, you have been exposed to information suggesting you visit your doctor or dentist for regular checkups. In addition to this bit of advice, we would like to suggest you take this five point test to check the financial health of your business.
Test #1: Do you understand all of the lines of information on your financial sheets? While most owners and managers know what each line of expenses contain, and how the gross margin is calculated, all lines of both the income statement and balance sheet are important.
Cost of goods sold, retained earnings, current income, accumulated depreciation and shareholder's equity are some of the lines that too often are not understood or overlooked completely. Each and every line on your financial statement is dependent on one or more of the other lines; knowing how they work together allows you to be equipped to utilize the one piece of information that measures your success.
Test #2: When will you be looking at your September financials? Many businesses are receiving financials two and three months after the end of the month. If this is the case for you, and an expense was out of line three months ago, the problem has often continued to grow in the succeeding months to where it may take many more months to correct.
For the business that is looking at the September financials in the first week of October, a problem that has first occurred in the past 30 days can be addressed if not corrected in the succeeding 30 days.
Test #3: Do you utilize a Cashflow chart and update it monthly? A shocking statistic is that 54% of the businesses that fail today, are profitable according to their financial statements. Their failure is due to a lack of cash; their assets are tied up in inventory, fixtures, equipment and other areas where they cannot quickly be converted into cash.
Many business owners and managers are taught to budget. You may even go so far as to create a budget, line by line, for each item on your income statement for each month of the year. It may show you to be profitable, but it does not indicate if there is cash on hand to sustain the business.
A Cashflow chart, usually created with a computer spreadsheet program such as Microsoft Excel, looks somewhat like a budget. It also takes into consideration how much money you start with, when you are paying for inventory, and your purchasing or selling of other assets.
A properly constructed Cashflow chart can be compared to having each of your next twelve financial statements on hand today. And with that information, you can make decisions about where you want your business to be. Can you afford to purchase a new computer? Will the expense of a new salesperson be justified by the increase in sales? A Cashflow chart allows you to manage by "what if" scenarios.
Test #4: Do employees understand financial management? Some of the most progressive businesses this writer has seen actually have financial sheets that they can share with their employees. Why would you want to do this?
Imagine the results of this scenario being played out in your business. One of your employees is asking for a substantial raise. As you discuss the raise with the employee, you point out that total payroll is already 18% of gross sales; that percentage being the accepted industry average for this business.
You show to the employee that the added cost of payroll would come entirely from your profits. To get a raise for the employee, you offer three possible solutions. The first is to suggest they help to find a way to increase sales so that the 18% can grow to include their raise.
The second solution is to fire another employee so that there is available salary dollars. Of course, the person desiring the raise will have to now do the work of both employees. And your third suggestion is that they help to find a way to decrease expenses below their current level, and that a part of the expense saving can now be given to the employee wanting a raise.
By having employees understand how a financial statement works, they are now equipped to understand how a business operates. And with employees having this understanding they are more likely to work for the goals of the business.
Test #5: Do you look at several financial ratios on a regular basis? Financial ratios are usually the last thing a business owner or manager wants to look at. While there are more than a dozen ratios you could consider, this is our short list that we suggest you post near your desk to review each time you complete your monthly financials.
Days sales outstanding - For the business that has accounts receivable, this number gives you an idea of how quickly you are collecting the money from your customers. Multiply the total of your receivables by 365, and then divide the answer by your net sales. If your terms are net 30, and your answer is in the 40 to 45 range, you should be pleased. When the answer gets higher, you need to address the slow payers and get your money back to work for you quicker.
GMROI - This acronym stands for gross margin return on investment, and is probably one of the most popular standards of measure. To calculate the answer, take your gross profit dollars and divide it by your average industry. The answer you would like to have will be 1.5 or higher.
Return on Assets - Just as a money market account will promote a rate of return, you can calculate a similar number for your business. Divide the net income (from your profit and loss statement) by the total of your assets. The number you have as an answer gives you an idea as to how your investment in your business if faring.
Turn rate - This ratio tells you how quickly you are turning the inventory in your business. Take the total of your sales and divide it by the total of your inventory. While businesses in the grocery industry will have an answer that will be well into the double digits, most retailers want to have a 3.5 turn or better as their benchmark for excellence.
the completion of a medical or dental examination, you are probably
told of a couple of areas that need some improvement so as to increase
your life span. With the completion of this financial test, hopefully
we have confirmed that your business is in excellent health. Or perhaps
we have alerted you to a couple of areas that need your attention. After
all, you do want to be healthy, wealthy and wise!
This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 1577, St. Petersburg, Fl. 33731. Phone 727-464-2182. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.
Profits Plus Solutions, Inc.