Tool Box
Issue No. 9 - February/March 2003
The Sum of All Fears
How to do some quick sums to find out how your business is really performing financially!
by Alan Green
How powerful can it be when you have information at your fingertips to readily identify where your business isn’t performing financially. Most business owners receive their financial statements from their accountants at the end of each year, put them in the filing cabinet and forget about them. You need to understand that your Balance Sheet and Income Statement contain a wealth of information to assist you in making decisions about your business and where it is or isn’t performing.
In this article we are going to look at the Balance Sheet and Income Statement as easy decision-making tools using fictitious company, Barker Products Pty Ltd and their 2001/2002 financials. To measure how the business is tracking we will use 11 ratios.
1. Current Ratio
This is the measurement of your ability to pay your debts over time, ascertained from the following figures on your balance sheet.
Formula
Total current assets : Total current liabilities
Barker Products
$915,000 : $730,000
For Barker Products this results in a ratio of 1.25 : 1 — which is not too bad. Try the ratio on your business and see how it rates against the following scale.
2 : 1 = strong
1.5 : 1 = good
1 : 1 = danger
2. Quick Ratio
This measures the relative ability to generate cash in a short period of time to pay bills.
Formula
Cash + Accounts Receivable : Total Current Liability
Barker Products
$15,000 + $350,000 : $730,000
In Barker’s case, this is 0.50 which is not good. You would be looking to get a ratio of around 1:1, as anything beneath this indicates varying signs of danger. In Barker’s example it suggests that an investment in stock is possibly causing the problem.
3. Debt to Worth
This ratio demonstrates who controls the business and what the level of external funding is compared to inter...
