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The timely completion and receipt of interim and annual financial statements are critical to the success and management of any business. Understanding where you are with respect to asset management, earnings, and trends is a critical component. It tells a story worth reading and understanding in detail. If finance is not one of your strengths, you need to have a strong strategic partner such as a good accountant or Chief Financial Officer (CFO), if your business is large enough to afford a CFO.
Earnings tell an owner an important story about performance, with respect to the market’s acceptance of the business products or service, along with margins and expense control. Many new or startup businesses experience nominal earnings, and even losses, for extended periods.
This is why having timely, accurate financial information is important, along with adequate levels of working capital and/or sources of capital for the business. A review of the gross profit margins and expenses is important to maximize earnings, along with the pricing of the product. Many banks and analysts will calculate a debt service coverage ratio.
It can be calculated several ways, but normally they look at the earnings number generated for the year, and add back-interest and depreciation or a percentage of depreciation, and divide the total by the debt service due annually (principal and interest). A good coverage ratio needs to be in the 1.25x to 2.0x range. This allows debt service to be paid, some level of fixed asset
purchases, and additional working capital for growth.
Trends can be indicators on the performance of the company, both in the short run and long-term. Trends can show both positive and negative aspects of the business, which allows the business and owner to be proactive on making changes in the best interest of the company.
Financial statements tell a story, allowing an owner to manage a business and to make sound business decisions. Those financial statements indicate the strengths and weaknesses, but also can be used to incorporate a budgeting program.
No fiscal or calendar year should be without a full analysis of the balance sheet and income statement, cash flow, trend, and ratio analysis, along with a budget for the next year. This could also be used to develop a three to five-year plan, which can be used for expansion purposes, equipment purchases, product diversification, or staffing.
Reading a novel can be enjoy able, relaxing, and fun. Why not make understanding your business a rewarding experience, too?
Accounts receivable can reaffirm success with respect to sales. Accounts receivable should be managed in order to keep payments received on a timely basis, based on the company’s policies. Past due levels and non-payment of accounts past 30 days can create reduced earnings and cash flow problems.
Fixed assets on the books require building reserves for future purchases. In a growing company, planning the time of the next major purchase, whether a new building or equipment, is very important. Debt-to-worth or leverage ratios come into play here.
Most businesses, once they’re established, should work hard to keep a debt-to-worth ratio (total debt divided by net worth) less than 2.0x. High debt levels put pressure on sales and earnings to service the obligations of the business, especially in slower periods.
Vice President of Institutional Advancement, Central Community College
Dean has a 30-year background in banking. He currently leads the
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