The challenges of financial management in a small to medium size company (SME) can pose a different set of problems and opportunities than those confronted by a large corporation. One obvious difference is that a majority of smaller companies do not normally have the opportunity to publicly sell issues of stocks in order to generate new capital. Instead the owner-manager must rely primarily on trade credit, bank financing, investment financing, and personal equity to finance the business. An SME therefore faces a far restricted set of financing alternatives than those available to the CFO of a large corporation.

On the other hand, many financial problems facing the small to medium companies are very similar to those of larger corporations. For example, the analysis required for investment decisions such as the purchase of machinery, securing bank loans, or even risk analyzing the business for sale is essentially the same regardless of the size of the company. Once the decision is made, the financing alternatives available may be different, but the decision process will be generally similar.

As a coach I look at my clients businesses from an investor's point of view. In general the goal of the coaching process is to create a commercial profitable enterprise that works without the owner. In other words providing my clients with choice:

1.    Put a general manager in place and receive a passive income from the business to invest in other wealth generating activities.

2.    To simply to take time out of the business whenever the owner(s) wants, knowing the business will continue to grow without them.

3.    Sell the business, which includes to family members or management, which inevitably means creating succession plans and/or exit strategies.

We know from previous newsletters that knowing your numbers and understanding your financial accounts is key to gaining Financial Mastery, and to having a better relationship with your accountant. We also know that eight of ten new businesses fail primarily because of the lack of good financial planning. I have previously discussed financial planning in relation to the necessity for cash flow budgets, break even analysis, marginal analysis, pricing formulas and compounding profit formulas... Now I want to introduce the equally important 'Financial Ratio Analysis'.

As a business investor myself these ratios are critical for my decision making process and the reason I measure them for clients, especially as part of an exit strategy. However, more than ever it is now vitally important for owner-managers to understand their business ratios because far more weight is now placed on them than in previous economies through your banks financial risk analysis of your business to release loans or increase overdrafts.

You apply Ratio Analysis to Financial Statements to analyze the success, failure, and progress of your business. Knowing your business ratios enables the owner-manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry.

One area of particular concern for the SME business owner lies in the effective management of working capital, (not to be confused with cash in bank). Net working capital is defined as the difference between current assets and current liabilities and is often thought of as the "circulating capital" of the business. Lack of control in this crucial area is a primary cause of business failure in both small and large firms. You must continually be alert to changes in working capital accounts, the cause of these changes and the implications of these changes for the financial health of the company. One convenient and effective method to highlight the key managerial requirements in this area is to view working capital in terms of its major components:

·         Cash and Equivalents

·         Accounts Receivable

·         Inventories

·         Accounts Payable and Notes Payable

·         Accrued Expenses and Taxes Payable