Soundpoint Consulting Newsletter
News and Views 

May, 2016:  Volume 41
 
 
  
Welcome to the Soundpoint Consulting Newsletter where we share our perspective on topics and highlight case studies we believe are relevant to business owners and leaders.

The topic of financial metrics (and the often little understood realm of financial ratios) has been a topic of several recent conversations I have had with business owners.  

I wrote this article a couple of years ago and decided it was time for a redux. I hope you find the information useful. 
 
Enjoy!

 
It's 11:00.  Do You Know What Your Financial Ratios Are?


Financial ratios are a fundamental barometer of the health of your business. You should know about where they are (along with your goals for the ratios that are key for your business) at any point in time. 

It is surprising how many business owners and leaders do not keep an eye of these important indicators. We suggest tracking them monthly, along with your Income Statement and other operating reports. 

It is worth noting that whether you track these ratios or not, others will. Potential buyers, 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 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.  
 
If you would like assistance understanding your financial ratios and developing a plan to improve performance, please give us a call. We would be happy to help.  
 
Until next month, Point Your Business Where it Needs to Go! 
 
Best Wishes,
 
 
Kelly

2016, Soundpoint Consulting, LLC
Sound Consulting. Solid Results

 Join Us
Kelly will be presenting at the 

Business Exit Planning Seminar
Strategies for a Successful Transition

June 3, 2016
Seattle Hilton

Use Promo Code FAC200 to receive $200 off!

Call to Register
206.463.4400 
or

 

About Us
 

Kelly Deis, Turning Point Financial

Kelly Deis

President

MBA, the Wharton School

CVA, Certified Valuation Analyst

CEPA, Certified Exit Planning Analyst

CDFA, Certified Divorce Financial Analyst


What We Do
 
We deliver full business valuations reports and related services for a variety of reasons, including exit planning,divorce and potential transactions.

We provide transition planning and value enhancement strategies for business owners who are ready for retirement or their next venture.

We offer strategy, operations and financial consulting for companies wanting profitable growth, improved efficiency and increased value.

We provide financial services for those in the process of divorce and needing to untangle the complexities of a financial separation.

Soundpoint Speaks
 
Blog Posts & Newsletters
 

more blogs..... 

 

Stay in Touch
 
Point Your Business Where it Needs to Go!