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Tips For A Healthy Business
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Business Financing
Whether you're just starting out or you're running an established business, understanding the fundamentals of business financing is essential.
These five financial management tips can help you take your business to the next level.
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TIP 1: Understanding Your Financial Statements
Important financial documents for most businesses are:
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Income Statement
Use the income statement to compare sales and expenses to previous periods as percentages. By viewing numbers as percentages, you'll
have a better perspective on what's actually taking place over time. To get the percentage, divide expense items by total sales. This will help you
compare your business and expense items to others in the same industry. Your lender will look for these percentages.
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Cash Flow Statement
Every business must be profitable to last. Cash flow can be more important than a profit on the Profit and Loss Statement. You may be
profitable at the end of the year, but if you don't have cash when you need it during the year, you won't make it. You can't pay payroll taxes with
accounts receivable.
Use the cash flow statement to record actual sales revenue received and expenses paid out during the month. Do this over the past year
and you'll be able to project next year's, or next month's cash needs. This will help you know cash shortfalls, and when and how much financing you'll
need, and when the money will come in to pay back the loan.
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Balance Sheet
This will give you a picture of your business' financial condition at a specific point in time; as of the date of the financial
statement. It will show assets, liabilities and net worth. Lenders like to see a business with solid net worth.
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TIP 2: Analyzing Your Numbers
Once you have your financial statements, use these ratios to determine your business' health and to compare to industry norms.
Current Ratio - Current assets divided by current liabilities; measures your liquidity: the ability to meet current obligations with current assets.
Debt-to-Worth - Total debt divided by Net Worth. Measures leverage: how much you owe lenders versus how much you've invested in the business lenders.
Gross Profit Margin - Net sales less cost of goods sold divided by net sales. Measures profitability.
Operating Profit Margin - Operating profit divided by net sales. Shows the main cash flow source.
Return on Sales Ratio - Net profit after taxes divided by net sales. Measures overall profitability.
Speak with your accountant and banker to find out which of these are relevant to your business, and what the industry norms are.
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TIP 3: Digging Deeper
Common areas of cash shortfall are inventory and accounts receivable.
Are you collecting accounts receivable on time? Follow the formula for the Accounts Receivable Ratio below to find out:
Accounts Receivable (as stated on your Balance Sheet)
Divided by your Net Sales (as stated in your income statement)
Equals = Receivable to Sales Ratio.
Now, multiply this Ratio by 365 (days in year)
Equals = # days Average Collection period.
EXAMPLE:
Accounts Receivable = $27,000, Net Sales = $175,000
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$ 27,000 = .15 |
365 |
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$175,000 |
x.15 |
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___________ 54.75 (55 days) |
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This means your average collection period is 55 days. Should you be concerned? It depends on your industry's norm. If your collection
period is long compared to the industry, you may need to reduce it to get cash coming in quicker. Seek your accountant's input.
Do you have the right level of inventory? Too high and you tie up cash and risk carrying obsolete inventory. Too low and you may lose
sales and the benefit of buying in quantity. Calculate your Inventory Turnover ratio to help balance this:
Inventory divided by Cost of Goods Sold
Multiplied by 365
Equals = How many days it takes to turnover (liquidate) inventory
Discuss your results with your accountant.
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TIP 4: Other Management Measures
Most business functions can be measured by things beyond company financials, and can make a direct contribution to your business' success and growth.
Productivity - Three most common productivity measures are:
Check your results and compare with industry and internal standards.
Personnel - Without a personnel/training department, the cost of recruiting, hiring, and training good employees can be high. The cost is usually
lower to keep good employees than constantly training new ones.
Sales and Marketing - Use your Business Plan to establish sales goals. Break them down into small increments. These goals will drive
the number of promotional pieces mailed, contacts made, leads generated, phone or personal calls made, and percentage of deals closed.
Know what your cost of sale is. If you know how many pieces of mail generate a certain level of sales, then you can project sales
increases by adjusting the number of pieces you send. This holds true for each method of marketing.
You must know what return will be generated for each marketing dollar spent.
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TIP 5: The Financing Proposal
Having the financial resources to achieve your goals is crucial for any business. To secure the financing you need to get ahead, you'll
have to create a Financing Proposal that will demonstrate that you know what you're doing. The good news is that once you've created a Business Plan, you've
done much of the work already. Your Business Plan can be modified to serve as the foundation of your Financing Proposal.
Here is what bankers look for when you approach them to finance your startup.
Track Record - As a startup, you must convince your banker (with your Business Plan) that your business will be successful. This is your
opportunity to sell yourself!
Business Credit - Since your business is new, the bank will look closely at how you've repaid personal debts. Get a copy of your credit
report and address any problems up front.
Personal Investment - A bank doesn't want to provide 100% of the money to start your business. The amount invested from personal assets
shows how confident you are in your ability.
Collateral - The bank needs to have something to secure the loan with. You can provide information on this in your balance sheet. Show
your assets, liabilities and owners equity.
Repayment - Show how you'll repay the loan with a monthly cash flow projection. Include details about the assumptions you use.
Business Plan - This helps the banker understand your vision-which is critical to your financing request. It also helps you focus ideas and
strategies, and measure their effectiveness later.
Experience - You should have the experience and expertise to succeed in your industry. Prepare a Professional Resume or Bio that will
demonstrate this.
When you project your business cash flow, you see what your deepest negative cash flow is, indicating how much money you need and when
you need it. Make sure to request enough financing up front.
Tell your lender what you need the money for, how you will repay it and why the loan makes good business sense.
REMEMBER: A sound Business Plan is your key to a successful business!
More Resources - Get more advice from these valuable sources
Chase Business Resource Center
Download Business Plan Template
SBA (Small Business Administration)
SCORE®1 Counselors to America's Small Business Bureau of Labor Statistics
SBA-Women's Business Center
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makes no representations or warranties as to the accuracy, completeness or timeliness of the information. The information is not intended to provide
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