Soundpoint Consulting Newsletter
News and Views
April, 2014:  Volume 16

  
Welcome to the Soundpoint Consulting Newsletter.

 

We use this newsletter to share our perspective on topics and share illustrative case studies that we believe are relevant to business owners and leaders.

If you would like our viewpoint on a topic, please shoot us an email. If you like what we have to say, please share it with a friend.

This month I would like to share some thoughts on financial ratios and how they can help guide your operations.
 
Enjoy!
 
It's 11:00pm.
Do You Know What Your Financial Ratios Are?

Let's hope so. Financial ratios are a fundamental barometer of the health of your business. Many business owners and leaders focus solely on the Income Statement and Balance Sheet.  It is surprising how many do not keep an eye of these important indicators. 

 
It is worth noting that whether you track these ratios or not, others will. Potential buyers, business valuators, bankers and investors will analyze trends and compare your company's ratios to your industry peers. Their determination of value and/or potential investment is ultimately at stake.   

 

But, perhaps even more importantly, understanding your financial ratios can lead you to improving your business operations. If a particular ratio is lagging the industry or trending negatively, there is most likely an action you can take that will realign the metric and improve operations. 

  
Financial ratios fall under four general categories according to the information they provide:

 

Liquidity Ratios measure how well a business can meet its obligations in the short term.


Efficiency Ratios measure how well a company utilizes its assets and liabilities.


Profitability Ratios measure a company's ability to generate earnings relative to sales, assets and equity.


Leverage Ratios measure the company's debt usage and how well it can afford its debt.


Which Ratios Should You Keep an Eye On?
There are a number of ratios you can track. Listed below are some of the key ratios and what you can do if they are getting off track.  


Current Ratio: The current ratio is a measure of solvency. This ratio indicates the amount of assets available to liquidate current debt and/or the company's ability to meet its current obligations.

 

The higher the ratio, the greater the company's liquidity. Strong cash management policies and procedures can improve this ratio.

Days Receivable:  This ratio provides the average collection period for sales.

 

The lower the number of days, the more quickly the company is collecting its receivables. Tighter payment terms and/or more aggressive collections can improve this ratio.     

          
Days Inventory:  This ratio provides the average number of days an item is in inventory.

 

A higher number of days implies excess inventory due to obsolescence or poor sales. A lower number implies either strong sales or inadequate inventory levels. Eliminating excess inventory and/or better inventory buying and management systems can improve this ratio.

Pretax Net Profit Margin:  This ratio indicates the amount of profit the company earns for every dollar of sales generated.

 

The higher the pre-tax profit margin, the more profitable the company.  Improving gross margins and tight expense control can improve this ratio.

Return on Assets:  This ratio indicates the number of cents earned on each dollar of assets. It measures the effectiveness of management in employing available resources.

 

The higher the ratio, the more productive the company's use of assets and the more profitable the business.  Improve efficiency in operating your plant and equipment and you will improve your return on assets.

Debt to Equity:  This ratio indicates what proportion of equity and debt the company is using to finance its assets. It denotes the relationship between capital contributed by creditors and that contributed by owners.

 

The lower the ratio, the less leveraged the company. To reduce the debt to equity ratio, the company must reduce debt and/or increase equity, in essence a recapitalization of the company. 


Financial ratios are a strong barometer for your business. Taken together they provide a comprehensive picture of the health of your business. It behooves every business owner and/or leader to know, understand and work to improve them.  

 

Until next month, Point Your Business Where it Needs to Go! 

 

Best Wishes,

 
Kelly
2014, Soundpoint Consulting, LLC

Sound Consulting. Solid Results.

In this Issue

It's 11:00pm. 

Do You Know What Your Financial Ratios Are?

Soundpoint News

"Business Valuation: 7 Key Components" by  Kelly Deis was published in the April, 2014 edition of the Kitsap Peninsula Business Journal.

 

We recently changed our name from Turning Point Financial to Soundpoint Consulting to better reflect our focus on strategy, operations, finance and business valuations.

 

Check out our website:

soundpointbusinessconsulting.com

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About Soundpoint
Soundpoint Consulting is a business consulting and valuation firm serving small and mid-market companies in the Seattle and Puget Sound region. We focus on helping high growth and transitioning companies grow profitably by performing deep financial analysis, translating insights into impactful operating initiatives, and backing those recommendations with execution support. 

We provide business valuations for purposes of developing an exit strategy, gift and estate taxes, divorce proceedings or a potential acquisition. 
Kelly Deis, Turning Point Financial

Kelly Deis,

President

Strategy and Operations: from realistic growth strategies to efficiency improvement
 
Finance: from financial modeling to infrastructure build-out
 
Turnarounds and Transactions: from business valuation to turnarounds and M&A support
 
News and Views
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March, 2014:

Client Snapshot: Retail Financial and Operational Turnaround

 

February, 2014:

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January, 2014:

Client Snapshot: Medical Practice Cash Flow Forensics

 

December, 2013:

Your 2014 Budget:  A Roadmap for the Year

 

November, 2013:

Client Snapshot:  Finance Group Assessment and Improvement

 

October, 2013:

Dashboards: Your Blueprint for success

  

and more ...

 

 

 

 

 

 

  

Contact Us

Soundpoint Consulting, LLC
206.842.4922 

Kelly Deis, President

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