Healthy, Wealthy & Wise
A five 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. 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 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.

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 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.

Test #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.

If 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.

Test #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 cash.

A properly 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.

Test #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 do this?

If 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 business.

Test #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.

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. You want your answer to be in the range of 40 to 45.

GMROI - 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.

Return 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.

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 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.

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!