Articles

Numbers; what to do with them.

Every month business owners and managers receive financial statements containing hundreds, if not thousands, of numbers. I have seen monthly reports of more than 20 pages. Tens of thousands of numbers, and it is enough to make your eyes glaze over. Having received all of these numbers, recipients feel duty bound to look at them. 


     The examination usually goes something like this: "let's see, what were the sales in January? How did they compare to last year? How did they compare to budget?" The same questions are asked about the net profit. If results were not up to expectations, hopefully, more questions are asked and people are held accountable for the lack of results.  


     This examination sounds right, but it is far short of what is needed. Readers need to focus on a few key relationships as well as the numbers. A couple of quick examples. (1) net profit of $1 million for 2015 may seem really great for you, but for Microsoft it would be a disaster, pretty much break even. The stock would crash and heads would roll. The amount of the profit is not what is important. We need to look at what it is in relationship to something else. (2) A net worth of $5 million may seem peachy, but if liabilities (all of which are past due) exceed $100 million, the company is close to being forced to liquidate and go bankrupt.  


     Every month key relationships should be calculated in order to measure what really happened. The numbers, by themselves, do not tell you all that you need to know about the performance and financial condition of the business. 


     The following are the relationships that I recommend you calculate monthly:
1. The current ratio that measures liquidity.
2. The debt-to-equity ratio that measures safety. 
3. Three income statement ratios that measure profitability; the gross profit margin, operating profit margin, and net profit margin. 
4. Four ratios that measure operating performance; return on equity, days sales outstanding, the Z score, and revenue per admin employee.
5. Three cash flow ratios; Operating cash flow, Financing cash flow, and Net cash flow. 


     A total of twelve key relationships that will give you an excellent perception of the actual condition and performance of the business, which you cannot derive from just looking at the numbers. Thousands of numbers are reduced to twelve.


      This may sound like a lot of work, but fortunately, I have a great Excel template that will calculate all of these relationships for you. All you have to do is take a few minutes and input the information. 


     Click on the links below to get this template and try it out. The thousands of numbers that you receive every month will be distilled to twelve highly informative and important relationships.


     You will be happy that you did. You will learn what you need to know about the business, and your eyes will lose that glaze! 

Financial Template for Movers

Example of Financial Template with sample company

Financial Template for General Business

Tracy Bech