STATEN ISLAND, N.Y. (JANUARY 2017) – While numerous small businesses succeed on Staten Island – from Stapleton to Tottenville, and across the borough – there are some that seemed doomed from the start.
Some of these failed businesses may have attracted a healthy flow of customers, but faltered because their owners didn’t have a handle on the various “financial ratios” that help guide sensible decision making. This is extremely unfortunate because a bit of additional know-how may help keep a fledgling business on a healthy track.
Although there’s no hard-and-fast rule for reviewing financial data, most experts recommend a minimum of monthly or quarterly evaluations. Otherwise, you risk spotting serious problems too late to take corrective action.
“It’s up to the small business owners to analyze and understand the meaning of their financials in order to make wise decisions – and today’s powerful, easy-to-use accounting software products can help,” said Business Mentor Anthony DeFazio, chairman of SCORE Staten Island, a local chapter of the national SCORE organization.
According to DeFazio, “cash flow” is a key indicator to watch. This is the revenue coming into your business balanced against expenses (rent, payroll, supplies etc.).
“Projecting cash flow into the future will help alert you to potential bottlenecks in meeting payment obligations, and whether changes in your collection strategy or operating budget are warranted,” he said.
DeFazio and his team of mentors at SCORE Staten Island recommend entrepreneurs become familiar with several financial ratios that can help small business owners gauge the health and progress of their enterprise. Because these ratios fluctuate over time, tracking them will help you better spot trends that could evolve into opportunities or problems:
1) Liquidity ratios measure the firm’s ability to meet short-term commitments from its liquid assets.
The current ratio (current assets/current liabilities) is a simple measure of a firm’s ability to meet short-term obligations. Similarly, the quick ratio (current assets-inventory/current liabilities) measures the firm’s ability to meet short-term obligations from its most liquid assets. The ideal average for both varies from one industry to another.
2) Leverage ratios indicate the company’s ability to meet both long- and short-term obligations, making them particularly important to bankers and investors.
The most frequently used indicator is the debt ratio (total debt/total assets). Generally, lenders want this ratio to be as low as possible.
3) Profitability ratios measure how well a company earns a net return on sales or investments.
Gross profit (gross profits/net sales) measures the margin on sales, essentially the overall effectiveness of the business. Net profitability (net income/net sales) shows the effectiveness of management in controlling costs.
4) Activity ratios show how well a company uses its assets to generate sales.
Small businesses that manufacture or sell products should monitor inventory turnover (cost of goods sold/average inventory), while businesses of all types should watch their average collection period (average accounts receivable/average credit sales per day) to determine if they are being paid promptly.
Need more help navigating your small business financial numbers? You’ll find plenty of free, confidential guidance at SCORE Staten Island.
About SCORE Staten Island
SCORE Staten Island is dedicated to fostering a vibrant small-business community within its borough by providing cost-free mentoring and education to both aspiring and established entrepreneurs. Headquartered at 1855 Victory Blvd., in the Staten Island neighborhood of Castleton Corners, the organization is Chapter 476 of the nationwide SCORE, a nonprofit association and resource partner with the U.S. Small Business Administration (SBA).