Jul 25, 2011

How to Assess Whether Your Business Is Doing OK

[caption id="attachment_393" align="alignright" width="367" caption="Assess whether your business is doing OK"]

[/caption] When there’s doubt about whether a football play earned enough yardage for a first down, the refs take a measurement. In business, too, it’s necessary to take a measurement every now and then. Instead of a tape, the tool you use is called a ratio calculator. Where are you now and where were you last year (or five years ago)? That’s the simple question that ratio calculators set out to answer. The comparisons help you chart your growth or see areas of slippage. They provide critical measures, like debt to assets, that you’ll need when you meet with potential funding providers. Bankrate.com has a variety of ratio calculators, which The Small Business Authority obtained permission to post. Try one of these: • Operating profit percentage calculator—fill in your operating income and sales. • Gross profit margin ratio calculator—fill in your net sales and the cost of goods sold. • Current ratio calculator—plug in your assets and liabilities. • Quick or acid test ratio calculator—plug in three numbers for an “acid test” on your company’s liquidity. Fill in assets, inventory, and liabilities to learn if you have a ratio acceptable to creditors. • Return on assets ratio calculator—fill in your net income and an average of your total assets from your last and current statements. This comparison will tell you how much income is generated by assets. • Debt to assets ratio calculator—fill in your total assets and total debt (this shows you whether your business is too highly leveraged to result in a good rate from a lender).

What’s a good number?

To get a sense of how your business stacks up, go to your library’s reference section for thick volumes of financial ratios where you can look up companies like yours by industry code (SIC or NAICS). The “Almanac of Business and Industrial Financial Ratios, 2011 Edition,” by Leo Troy, Ph.D., shows financial information from 5.8 million corporate tax returns filed from July 2007 to June 2008. As an example, a manufacturer of baseball caps (code 315990) that has less than $500,000 in assets would stack up well against others of its size in its industry if it had a current ratio of 1.8 and a return on assets of 50.3, to pick just two of the ratios in that reference book. A sporting goods store would look good if it had a current ratio of 2.3 and a return on assets of 23.5. Dun & Bradstreet also publishes key business ratios. Additionally, CPAs and accounting firms can help you not only find out if your numbers are good but also decide what to change in your operations to improve the ratios. You may also want to look at The Risk Management Association’s “Annual Statement Studies: Financial Ratio Benchmarks, 2010–2011.”