A small business operator views an enterprise as a source of immediate income while an investor examines the company for its long-term value. Looking at your business as an investment is certain to yield a new perspective. Although a sound investment will deliver income, positioning your business for a long future is different than seeking only current profits.
Near-term income is the offspring of generating sales. But a sound long- term investment is something different. It’s a consequence of the sustainability of rising short-term sales. These two elements can be difficult to fuse together without creating friction. Growth will often cause best practices to go on holiday. Fortunately, an assessment of financial reports yields a quantitative determination of your growth management ability.
Liquidity Measures
You may think that revenue and profit are the only relevant measures of business success. But an investor’s evaluation begins with the Balance Sheet. This report conveys the amount of cash and the costs of assets held by the enterprise as well as how much has been borrowed. It tells you everything about company liquidity, which is how easily you get money from your investment in the business.
Calculating a few key ratios using figures on the Balance Sheet permits you to discern liquidity. Current Ratio is the most commonly used measure. Simply divide current assets by current liabilities and expect a result greater than 1. Current assets are cash and receivables plus easily liquidated inventory. Current liabilities are all the bills you owe (accounts payable) as well as loan payments in the upcoming year.
Transform liquidity evaluation into greater enlightenment by identifying how quickly you collect accounts receivable, sell inventory, and pay your bills. These turnover ratios are uncovered with the assistance of an accountant. But identifying the figures is only possible when you have accurate up to date bookkeeping that provides a Balance Sheet along with an Income Statement.
A valuable company has high turnover ratios. It quickly collects on its invoices and promptly pays its bills. Turnover analysis reveals that accounts receivable and accounts payable are not staying on the Balance Sheet for extended periods. And any inventory is swiftly sold. An efficiently liquid business will not have over stocked with inventory.
The Finance Writer 