How is Your Business Doing?

posted: June 09, 2010

your business vs. the industry

That is a good question for all business owners - especially in these uncertain economic times. You probably have a good idea how your business is doing - but the real question is: how is your business doing against the industry of like businesses in your region?

Over the next several weeks, we are going to run articles that review key areas on assessing how to measure your business performance. Our subjects will include liquidity, profit margins, sales ratios and more. And we promise to keep it simple.

We then invite you to run your own business assessment. This will give you an idea how your business is doing as compared to other similar businesses and what measures you can take for improvement. This report is FREE of cost without obligations. Simply contact us at: info@nacbb.com

our first topic: liquidity

Liquidity is a measure of the company's ability to meet obligations as they come due. In other words, do you have enough cash flow to pay your bills?

Our report will measure your general liquidity position against the industry. We will analyze key measurements as described below:

current ratio

Current ratio is calculated by:

current assets / current liabilities

Current assets include: inventory + accounts receivables + cash equivalents + cash on hand

Current Liabilities include: accruals + accounts payable + notes payable

Generally, this metric measures the overall liquidity position of a company. It is certainly not a perfect barometer, but it is a good one. Watch for big decreases in this number over time. Make sure the accounts listed in "current assets" are collectible. The higher the ratio, the more liquid the company is.

quick ratio –

The quick ratio is calculated by:

current assets (minus inventory) / current liabilities

Current assets include: accounts receivables + cash equivalents + cash on hand

Current Liabilities include: accruals + accounts payable + notes payable

This is another good indicator of liquidity, although by itself, it is not a perfect one. If there are receivable accounts included in the numerator, they should be collectible. Look at the length of time the company has to pay the amount listed in the denominator (current liabilities). The higher the number, the stronger the company.

inventory days -

Defined as the average number of days goods remain in inventory before being sold. This metric shows how much inventory (in days) is on hand. It indicates how quickly a company can respond to market and/or product changes. Not all companies have inventory for this metric. The lower the inventory days, the better.

account receivable days -

This number reflects the average length of time between credit sales and payment receipts. It is crucial to maintaining positive liquidity. The lower the better.

account payable days –

This ratio shows the average number of days that lapse between the purchase of material and labor, and payment for them. It is a rough measure of how timely a company is in meeting payment obligations. Lower is normally better.

Tips For Improvement

Here are some possible actions that management might consider if appropriate (these are ideas that might be thought about):

• Establish contractual agreements that allow as much collection up front as possible for large jobs.
• Speed up the billing of customers (even three days earlier each month) in order to accelerate the collection process which can significantly improve the firm’s cash position.
• Consider providing different credit terms to different customers based upon credit-worthiness (risk) and the overall relationship involved. Make sure giving credit will increase revenues/income and be cost effective. Also, if beneficial, provide discounts to customers who pay early.
• Monitor the impact that tax payments may have on cash. Keep enough money aside to be able to meet future tax obligations based on earnings.

request your own company assessment

You may request your own company assessment FREE of charge. There is no obligation and all information is held is strict confidence.

Contact us for more information:

Krayton M Davis
804-527-1103
kdavis@nacbb.com