Wenatchee Office located at 238 Olds Station Road, Wenatchee. By appointment call 509-888-7252 or email jim.fletcher@wsbdc.org

Friday, September 20, 2013

Understanding the Balance Sheet

As a business adviser I have observed many small business owners who do not have a good set of financial statements.  Often missing is the financial report containing current balances for asset, debts and net worth of your business.  A good balance sheet can reveal subtle trends of increasing debt, inventory control problems, and cash flow problems.  Additionally a good balance sheet is required when seeking a business loan approval and used in determining the value of your business.    

Balance sheets are a record of your financial status at a specific time.  Comparing balance sheets across different times will reveal trends in your business enabling you to take timely corrective actions. 
Try these steps to see what the balance sheet reveals about your business. 

Compare this month to last month   
      Check balances of current asset accounts for cash, accounts receivable, inventory, and current liability accounts for accounts payable, taxes payable, payroll payable.  Calculate a Quick Ratio by dividing the total CASH + Accounts Receivable by the total current liabilities. A low Quick Ratio indicates pending trouble in paying your bills.  A Quick Ratio greater than 1 to 1 is desirable, indicating sufficient ability to pay your bills. 

Show Me the Cash! A common problem for small business is cash flow, while the profit and loss statement shows a profit there is no cash in the bank. Common places to look for what happened to the cash are the accounts receivable, inventory. If the amounts in inventory and or accounts receivable are increasing then more of your cash is tied up until inventory is sold or customers pay their bills.  

Working Cash: Another method for determining how much cash you should hold in the bank is to calculate working capital needs by subtracting total current liabilities from total current assets then divide by sales. 

Cash hides in Inventory:  Efficiency can be monitored by calculating inventory turnover. Divide cost of goods sold as shown on the profit & loss statement by the value in inventory. If the ratio is 2 then each dollar of inventory worked twice, if the ratio is 6 then each dollar worked  much more efficiently at 6 times.  

Financial HistoryIn the equity section of a balance sheet the line for Retained Earnings is a track record of your business performance, adjusted for amounts taken out by the owners.  Retained earnings also represent the amount of value re-invested in growing the business.  

Return on Effort: Efficiency of your business can be measured in several ways.  A ratio measuring sales to assets indicated how hard your assets are working. Low sales to assets ratio may indicate you have too much money tied up in assets.   Return on Equity, pretax profits divided by net worth, reports the earning benefit of your investment in the business.   

Friday, September 6, 2013

Low Sales Is A Symptom Not A Problem

Low sales are not the problem it is a warning sign that something more fundamental needs to be addressed.

When management is focused on declining sales as the problem the solutions are typically to do more, run faster, try harder. However attention may need to be redirected to find the cause of declining sales.

There are many factors that can cause declining sales and some objective thinking and self-reflection may help you identify the correct causes. Objectively consider the following:

  • Am I responsive and friendly with my customers, suppliers, employees? Note: employees tend to behave the same way the boss does.
  • Do my products satisfy the customer’s desired level of quality, service, or performance?
  • Are my products/services meeting current technology standards?
  • Are my prices correct
  • What are my customers really saying about my business? Do I really listen to the customers or do I jump to solutions before the customer has expressed their thoughts? You might find this video thought provoking are you really listening? http://vimeo.com/66753575
  • Is merchandising, floor layout, store decor, cleanliness, signs, inviting, up to date?

It might be easier to sit down with an objective outsider to contemplate and ask yourself questions like this to identify factors that you may be totally missing when you assume you've got a "sales" problem. Involve employees in the discussion their observations may bring a fresh perspective. Bring in someone from outside your business, who has no vested interest to protect.

Low or declining sales is always the result of some situation or lack of performance so focus on identifying the real problem to come up with an effective and lasting solution.