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Keeping the Books
Taking Your Company’s Pulse
How’s the financial health of your business? It’s a question every business owner ponders, especially given the challenges of today’s economic climate. To figure out exactly where you stand and to know which numbers to keep watch on in 2003, you first need to examine your income statement. In doing so, there are a couple of key questions to consider:
- Sales. Are revenues increasing? If not, is the market shrinking, or are you not keeping the pace?
- Operating profit margin (earnings before interest and taxes, divided by sales). Is your margin better or worse? If worse, have you let operating expenses, such as salaries, rents or utilities get out of control?
- Interest expense. Is interest eating up your operating profit? If so, you may have too much debt.
After this exercise, check your balance sheet for these three calculations:
- Working capital (current assets minus current liabilities). If this number is negative, you may have trouble paying your bills.
- Current ratio (current assets divided by current liabilities). This ratio should exceed 1:1. A higher result (2:1 or over) is even better.
- Leverage. Calculate the ratio of total liabilities to net worth. If this is higher than 3:1, you may be relying too heavily on debt.
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