How Healthy Is Your Business?
Patty Block
Income Statement, Balance Sheet, Statement of Cash Flows are the three core financial statements you should be looking at.
To make the most of the “big three,” there are many financial ratios you can use to add more context to your financial data. Here are a few key metrics you can look at to measure your financial health:
Liquidity: Though many measures of liquidity exist, one that you can focus on immediately is the Current Ratio.
Cash Flow: Your cash flow ratio is calculated using the following formula: Cash Flows from Operations / Total Revenue.
A/R Collections: Accounts Receivable Turnover is a more complicated measure to calculate, but the results can be very telling for many business owners. The formula is Net Credit Sales (no cash sales included) / Average Accounts Receivable (average A/R is beginning plus ending divided by two). The number that is generated shows you how many times in a year you turn over your Accounts Receivable.
Profitability: Possibly one of the most useful metrics around, your Profitability Ratio is expressed as: EBIT / Total Revenue. EBIT is your earnings before interest and taxes. What this powerful measure tells you is the amount of profit you are creating for every dollar in sales.
Returns: The two most common expressions of economic return are Return on Equity and Return on Assets. But let’s look at another measure that might have even more value to a business owner: Return on Capital Employed (ROCE). Your ROCE is calculated like this: Annualized EBIT / Total Invested Capital. This calculates the return on the owner’s capital investment and can help you measure how quickly you are adding to your net worth by operating this business.
As the old business adage goes, you can’t manage what you can’t measure. Taking the time to measure your financial performance in these ways, or whatever ways are meaningful to you—can pay off significantly by improving your decision making on a daily basis.
Source: EMyth
Patty Block, President and Founder of The Block Group, established her company to advocate for women-owned businesses, helping them position their companies for strategic growth. Charting the course for impactful, sustainable, profitable businesses, the beacon is control: of your strategic direction, your money, your time, your staffing, and your ability to bring in business. The Block Group brings together the people, resources and ideas that build results.
Patty Block.
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