My column in this week’s Tennessean looks at key financial information you need on your dashboard to help you navigate these challenging times:
It’s beginning to look like we may be in this recession for quite some time. Even if your small business has survived to this point, it still could be financially vulnerable to the continued sluggishness in the economy.
Unfortunately there is no single number or financial measure that can fully assess the threat a business faces. It is important to keep your eye on several key numbers and ratios. When put together these are referred to as a financial dashboard — an easy-to-read series of figures that gives a good overview of how a business is faring.
The first category of figures that should be on your dashboard each month helps assess how well you are managing debt. A ratio that bankers pay particular attention to is times interest earned, which assesses how well your business can cover its loan payments owed to the bank.
The percentage of your assets financed through debt is another key ratio. Finally, the overuse of credit card debt can make a business more vulnerable.
The second category on your dashboard should assess the strength of the cash position of your business. Never forget that “cash is king.” Monitor your cash reserves carefully.
Vic Alexander of KraftCPAs recently advised a class of entrepreneurs that I was teaching to have enough cash on hand to cover at least 45 days of expenses. If customers pay on account, monitor the average age of your accounts receivable.
Finally, looking at the ratio of cash to current accounts payable each month is another good test of the strength of your cash position.
Watch your suppliersYour business is also dependent on the financial health of suppliers and customers. Add some measures to your dashboard that help you monitor them, which can include:
• The number of suppliers that still let you buy from them on credit.
• The increase in new customers you are able to attract each month.
• Your ability to attract returning customers.
• Your dependence on a few large customers.
• Revenue trends from month to month and compared to the same time last year.
• If you carry inventory in your business, watch it closely from month to month to ensure that you are not building excessive inventories.
My friend, Dr. George Solomon, a professor at George Washington University, and I have put all of this together in an online assessment for Entrepreneur magazine that walks you through each calculation.
It is available free of charge at www.entrepreneur.com/quiz/threatindex/index.html and will provide you with an overall score that helps you evaluate your financial vulnerability.
So, pull out your financial statements, grab a mug of coffee and take an honest look at the financial health of your operation.