With the economy in a recession, many businesses find themselves struggling to remain viable. Here are a few tips to help you get through these difficult times. Additionally, we've included some financial ratios that are useful in measuring a business's financial health. These indicators can highlight weaknesses in the organization, which can then be addressed, and thereby improve the overall health of the business. Also, this information can be used to benchmark your business against other similar businesses in order to see how you are performing in comparison.
TIPS
- Review your balance sheet to assess your current financial position. It is extremely important to know where you stand. Do your assets exceed your liabilities? Is there enough cash available to meet short-term needs? Liquidity is the name of the game in light of the current credit crisis, so you should conserve cash.
- Review your income statement to assess your monthly income and expenses. Are you meeting your budget? What is your break-even point? What are your cash flow needs for the next three to six months? Review variable and discretionary spending to see what can be reduced or eliminated.
- Take a look at your financing options and your lenders. Are you in compliance with credit terms? Review your credit agreements to see when they renew. Consider whether the lender will renew at similar terms. If you are struggling with making payments or in default, consider meeting with them to restructure the terms. Research other sources of financing such as the Small Business Administration or local economic development agencies such as the Pulaski Empowerment Zone.
- Analyze your accounts receivable and monitor them aggressively. If you have customers that are not in compliance with payment terms, contact them to see when they will make payment. If you do not contact them, they may put you at the bottom of the stack.
- Monitor accounts payable closely and consider foregoing early payment discounts in order to conserve cash flow. If you are having trouble paying your vendors, contact them to see if more favorable terms can be negotiated.
- Review costs to see if any can be passed through to your customers, such as a fuel surcharge.
- Make sure you do not have more than $250,000 in any one bank so that your funds will be FDIC insured. The $250,000 FDIC insurance limit was raised from $100,000 and will remain in effect until December 31, 2009. If you have more than $250,000 in any one bank, consider moving the excess to another FDIC insured bank.
- Consider postponing capital investment until the economy improves. Again, conserving cash flow is extremely important.
- Review your investments to make sure your portfolio is properly diversified. Meet with your financial advisor to see what adjustments to your portfolio may be needed.
- Re-evaluate your business plan and make adjustments for the current economic conditions. Seriously consider whether or not your business will be able to pull through the recession. In an effort to protect and preserve your personal wealth, you don't want to invest more of your money into the business if a serious evaluation of the numbers reflects that the business is not going to remain viable.
RATIOS
Liquidity ratios measure the ability of a business to meet its short-term financial obligations when they become due. In the current economy, cash is king.
- Quick/Acid Test Ratio = Cash plus marketable securities and current receivables divided by current liabilities.
- Current Ratio = Current assets divided by current liabilities
Working Capital/Cash Flow ratios measure the ability of a business to generate cash. Working capital from operations is derived by subtracting current liabilities from current assets.
- Cash flow from operations divided by net sales
- Cash flow from operations divided by total assets
- Working capital from operations divided by net sales
- Working capital from operations divided by total assets
Debt Service Coverage ratios measure the ability of a business from its operations to service interest payments that are due to nonequity providers of capital.
- Operating income divided by annual interest payments
- Cash flow from operations divided by annual interest payments
Profitability ratios measure the ability of a business to generate revenues in excess of expenses.
- Net income divided by revenues
- Net income divided by shareholders' equity
- Net income divided by total assets
Turnover ratios measure the efficiency with which a business uses its assets.
- Sales divided by total assets
- Sales divided by accounts receivable
- Cost of goods sold divided by inventories
Times are tough, and we want you to know that we are here for you. As your trusted advisor, we can help you evaluate your business, as well as your options. The information above is just a sample of the analysis that can be applied to help improve your business. Please give us a call at (501) 374-2910, and we'll be pleased to assist you in any way possible.