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.

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 www.gnco.com www.byteofadvice.com

3. Analyzing Your Financial DataAnalyzing Your Financial Data
What does it all mean?What does it all mean?

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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::

13. 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

14. 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

15. 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

16. 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

17. 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

18. Questions?Questions?