How to make more money - part 3 - circa 1997


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Chaim Yudkowsky, CPA, CITP, CGMA - Byte of Success

Part 3 of a series delivered in 1997 focused on helping small and midsized business become more profitable.

Published in: Economy & Finance, Business
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How to make more money - part 3 - circa 1997

  1. 1. How to MakeHow to Make More MoneyMore Money Part 3Part 3 presented bypresented by Chaim Yudkowsky, CPAChaim Yudkowsky, CPA Grabush, Newman & Co., P.A.Grabush, Newman & Co., P.A. 410-296-6300
  2. 2. Analyzing Your Financial DataAnalyzing Your Financial Data What does it all mean?What does it all mean?
  3. 3. RatiosRatios Are a good indicator of the health of a business Are a great measuring stick to monitor various areas of a business Help management identify areas for improvement Help creditors evaluate cash flow and liquidity
  4. 4. Current RatioCurrent Ratio How many dollars should be available in next 12 months to pay liabilities that will mature Example shows $3.12 available for each $1.00 in liabilities—a healthy current ratio Rule of thumb: $2.00 for each $1.00 Current Assets Current Liabilities = $510,862 $163,679 = 3.12
  5. 5. Quick RatioQuick Ratio Gives an indication of how quickly a company can pay its current obligations without relying on future sales. Example indicates a very healthy company. $1.00-to-$1.00 is a good basic ratio. = 2= Cash and Accounts Receivable 182,559 + 146,281 Current Liabilities 163,679
  6. 6. Accounts Receivable TurnoverAccounts Receivable Turnover Indicates how many times A/R are being paid and reestablished during accounting period—higher the turnover, faster the collections. The collection of accounts receivable is critical. Keep a close eye on this ratio. If it begins to indicate collections are slowing, take strong action to improve collection policies. = = 9.1 Net Sales 1,336,454 Accounts Receivable 146,281
  7. 7. Determine the number of days’ sales in accounts receivable, take the ratio derived and divide it into the number of days in the accounting period. – Example, using 365 days (a year) divided by 9.1 indicates approximately 40 days’ sales in A/R—a healthy rate. Average Sales DaysAverage Sales Days OutstandingOutstanding
  8. 8. Inventory TurnoverInventory Turnover Number of times a business turns inventory during the year. Indicates stock to sales ratio rather than an actual physical turnover. For a complex company that chooses to calculate profit and loss by inventory lines, this ratio is valuable in determining under- and over-stocking and obsolescence of inventory by product. = = 4.8 times Cost of Goods Sold 778,082 Inventory 160,993
  9. 9. To determine the number of days of inventory on hand at any given time, divide the number computed into the number of days in the accounting period. – Example, using 360 days (a year) divided by 4.8 indicates approximately 75 days of inventory on hand. Days Sales in InventoryDays Sales in Inventory
  10. 10. Accounts Payable TurnoverAccounts Payable Turnover Indicates the number of times accounts payable will be paid during the year. To determine number of days a business will take to pay its bills, divide amount indicated (8.4) into number of days in accounting period. – Example: 360 days (1 year) divided by 8.4 = accounts payable are being paid every 43 days. Purchases 792,362 Accounts Payable 94,272 = = 8.4
  11. 11. Using the RatiosUsing the Ratios Look at the accounts receivable turnover, 40 days. Compare to accounts payable turnover, 43 days. What this means: Company is paying its bills more slowly than it is collecting its accounts receivable—in effect, borrowing from its suppliers to expand its working capital. Using our examplesUsing our examples::
  12. 12. Debt to EquityDebt to Equity Compares the amount invested in the business by creditors versus amount invested by owners. Most small businesses have a 3-to-1 or larger ratio because they are under-funded by owners and must continuously borrow. Large ratio may be an indication company may have difficulty paying its debt. Important ratio when securing bank financing. = = .35 Total Debt 193,073 Total Equity 553,907
  13. 13. Gross Profit to Net SalesGross Profit to Net Sales Indicates how many dollars of gross profit are earned from each dollar of sales made. = = 43% Gross Profit 575,000 Net Sales 1,336,454
  14. 14. Operating Expenses to NetOperating Expenses to Net SalesSales Indicates how many dollars of operating expenses are expended for each dollar of sales made. If too high, may indicate that overhead needs to be reduced, sales increased, or that there is too much borrowing. = = 34% Operating Expense 455,513 Net Sales 1,336,454
  15. 15. Net Income to Net SalesNet Income to Net Sales Indicates how many dollars of profit are earned from each dollar of sales made. = = 8.9% Net Income 119,487 Net Sales 1,336,454
  16. 16. Other RatiosOther Ratios Income per employee Employee productivity Employee realization Job / project statistics Sales per customer Sales per customer transaction Number of units per labor hour Other
  17. 17. Questions?Questions?