five point self-examination of your business
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. We would like to suggest you take this
five-point test to check the financial health of your business.
#1: Do you understand all the lines of information on your financial sheets? While most owners 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.
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 are 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 this information.
#2: 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 some three months ago, the problem has often
continued to grow in the succeeding months to where it may take
many more months to correct.
your business is looking at the September financials in the first
week of October, a problem that has occurred in the past 30 days
can be addressed, if not corrected, in the succeeding month.
#3: Do you utilize a cashflow chart and update it monthly? Most
of the businesses that fail are profitable. Their failure is due
to a lack of cash as their assets are tied up in inventory, fixtures,
equipment and other areas that cannot quickly be converted into
constructed cashflow chart can be compared to having each of your
next twelve financial statements on hand today. With that information,
you can make decisions about where you want your business to be.
#4: Do employees understand financial management? Some of the most
progressive businesses this writer has seen actually have financial
sheets they can share with their employees. Why would you want to
you were to ask your employees what they think is the bottom line
on the financial sheet, you will hear 25% to 35% instead of the
single-digit percentage that you know it is. By having employees
understand how a financial statement works, they are now equipped
to understand how a business operates. When employees have this
understanding, they are more likely to work for the goals of the
#5: Do you look at several financial ratios on a regular basis?
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.
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. You want your
answer to be in the range of 40 to 45.
- This acronym stands for gross margin return on investment, and
it is probably one of the most popular standards of measure. To
calculate the answer, take your gross profit dollars and divide
by your average inventory. The answer you would like to have will
be 1.5 or higher.
on Assets - Just as a money market fund will promote its rate of
return, you can calculate a similar number for your business. Divide
the net income 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 is faring.
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 the grocery industry will have
an answer that will be in double digits, most retailers want to
have a 3.0 turn or better as their benchmark for excellence.
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!