Running the Business by the Numbers

What are the gross margins of your business?  How many sales does it take for those gross marginal dollars to cover your other expenses?  On average, how many days does it take for you to convert accounts receivable to cash?  And what would affect would shortening that time have on your cash flow?  Do you have target cash flows and what will you do with the cash once achieved?  Will you simply pocket the cash or invest some of it in the business?   What kind of risk do you run if your short term assets are lower than your short term liabilities?   How good are your physical assets (vehicles, property, equipment) at generating revenue?  How effective are your total assets at generating income?

Each one of the questions above can be answered by financial ratios: gross margin profitability; day sales outstanding; current and quick ratios; return on assets; and more.  Each serves as a window into how well your business is doing.  Your business may have certain constraints imposed by your industry: restaurants, for example, tend to have low gross margins; government contractors have high accounts receivable.  But these ratios will tell you how well your business is able to generate cash (that’s the objective of most businesses); what you can do to maximize the cash potential; and how your business compares to others in your industry.  You can consult the Risk Management Association reference guide to determine the best and the worst in class ratios for your industry.   You can simply query your favorite search engine.  You can ask your accountant or a management consultant.  Check it out.   You may find that it helps you identify a problem you never thought you had.

One more thing.  You may feel that your business’ financial health and your customers’ satisfaction are sometimes in conflict.  That happens all the time and then it’s a business decision how you decide which to prefer.  At least you’ll understand the financial implication.

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