THE TRICK WITH financial information is to concentrate on the key areas and ignore the rest. Don’t allow yourself to get bogged down in line-by-line data. Here are the important areas to control in your business:
1. Inventory
Often your largest asset, and certainly the greatest absorber of cash. The critical questions here are:
- What is the right amount of inventory for me to have?
- Do I have enough/too much inventory for my business?
- Is my inventory saleable?
Answer the first and second questions by measuring your inventory relative to sales. The third is best dealt with by looking at your percentage of aged inventory relative to new inventory.
2. Debt
What is your level of debt relative to assets? Many companies overextend themselves in this area. A ratio of more than 50 percent debt to total assets should set alarm bells ringing. The interest rate is also critical. What level of debt or repayments can you handle if rates were to increase?
Consider vendor debt as well as financial debt, such as a line of credit, bank overdraft and other loans.
3. Profit
If you are losing money, you are a ticking time bomb. Ask yourself:
- What is my break-even level of sales?
- What profit should I be making from the investment I have made in my business?
- How is my actual profitability relative to these questions?
- During the months when I don’t make a profit, do I have arrangements in place to see me through to the months when I do make a profit?
Don’t forget to take into account owner’s wages. If you are not paying yourself a separate wage, then you haven’t taken into consideration the return needed for your effort. Profit is the result after paying your personal wages.
4. Cash Flow
This is the single biggest reason for business failure. Profit is not cash flow. Time and time again, we see business owners living beyond their means with vehicles purchased on finance and exotic overseas vacations that their store cannot afford. Determining your positive or negative cash flow is a crucial part of operating your business.
Once you have pinpointed which of these four areas are cause for concern, you can then investigate more detailed figures in the respective areas.
This story is from the January 2010 edition of INSTORE.