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Healthy,
Wealthy & Wise "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!
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MAY 2024
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With over 25 years of frontline experience Tom Shay is America's leading Small Business Management Expert. He's a "Must Have" for your next event.
Small Business
The May Small Business Advisory is titled "Planning for a successful accountant" and is appropriate for many with the April 15 tax deadline having passed.
Did you work with your accountant? Or, did you just give them a bunch of papers and wait to receive a completed tax return?
Successfully working with an accountant requires a partnership. This month's Small Business Advisory gives suggestions of how to make this happen in 2024.
Small Business
We see that many small business owners have too much of a focus on the "top line" of their income statement.
Increasing revenue is great, but it is not a cure all for any challenges your business is facing. And sometimes, incresing revenue can create a challenge.
Who is your customer? Some small businesses have no focus. Their customer is whoever calls or walks in the door.
And some small businesses have determined which customers, in sufficient numbers, they should spend their efforts to attract.
The article of the month shares an old Southern rhyming couplet about business; "The bertter you niche, the more you get rich."
Lean Startup by Eric Reis is our suggested book for May.
As the title suggests, the reader of the book would be someone that is starting their business. However, we see more value than just that.
Perhaps you have been in business for many years. We think this book could give insight to items, and methods, that a small business owner should think about with their business today.
