Lessons From the Strategic Mgt. Workshop
March 21, 2006
What Are Your Financials Really Telling You?
By: John Zink
The majority of p-h-c business owners review their income and balance sheets each month and can get a “feel” for the health of their company. Unfortunately, some do not go beyond this level of analysis to get the complete picture of the health of their business. Assumptions made on these quick looks at the books can lead to poor business decisions and possible financial troubles down the road.
A key business management concept promoted by the PHCC Educational Foundation and their project management course director, Kirk Alter, is to “Manage with Numbers!” Just a quick glance at the finance sheets does NOT give enough you information to see if you can afford a new truck!
For an example of using real numbers to manage, let’s look at the lending industry. Your lenders can look at your income and balance sheets to determine your financial ratios and what they mean for your company’s financial health.
These financial ratios are numbers generated by crunching figures from your income and balance sheets through a series of formulas. The results can be compared against industry averages to determine just how healthy your company’s finances are.
Some common ratios are:
- Current Assets to Total Assets
- Return on Investment
- Net Profit Percentage
- Average Age of Material Inventory
- Average Age of Underbillings
- Average Age of Overbillings
- Average Age of Accounts Receivable
- Debt to Equity Ratio
- Cash Conversion Period
- Cash Demand Period
- Working Capital Turnover
- Net Profit to Working Capital
- Degree of Fixed Asset Newness
Lenders use your financial ratios to determine how much money they can safely lend you and what interest rate to charge to offset their risk of you defaulting. Your bonding company uses many of the same formulas to determine your bonding capacity. If you are stuck with bonding capacity lower than what you think the company can handle, it may be a sign that your finances are showing warning signs that you are not seeing.
If you want to increase your bonding capacity and get better financing at the bank, you must know what your financial ratios are and how they are used to determine your credit risk level. You will be in much better position to ask for better financing or extra bonding capacity if you can demonstrate to a lender that you understand what your finance sheets are really telling you.
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