Here’s a news flash! Spring arrived some 30-45 days sooner this year! While this means opportunity and potential business for some companies, others will experience a substantial short fall in profit and a tightening of cash flow. What happened to all the snow? Cutting warm season grass in March….Yikes! Steady the ship and get your arms around your Balance Sheet.
Start with these:
1. How much profit and cash is being eaten up by Balance Sheet transactions?
A. Look at your current amortization schedules on existing debt and identify the next 12 monthly required principle payments.
B. Take the amount and timing of any new loans you are trying to get approved and put the details into an amortization schedule. Add this expense on top of the existing principle debt payments.
C. Add monthly dollars for any owner draw or distribution. This would include taxes for S-Corporation owners.
Example: Monthly Payments from schedules and requirements
A. $ 5,000.00 + B. $2,000.00 + C. $3,000.00= $10,000 per month Total
In simple terms according to the example above I need to generate $10,000 per month in profit to cover these Balance Sheet expenses. If I generate less than $10,000 per month in profit then I have to borrow money to meet my obligations ( Line of Credit) or eat into available Working Capital : ( Cash + AR) – ( Payables). Eating into available Working Capital assumes you have some!
2. Know your Balance Sheet Benchmarks- Strong Balance Sheet.
|Debt to Assets||LT Debt $ / Straight Line Net Fixed asset $’s||40%||Or less|
|Asset Turnover||Revenue $’s / Total Assets $’s||375%||Or Greater|
|Current Ratio||Current Assets ( Cash + AR) / Current DB( Trade + LOC)||200%||Or Greater|
|Debt Coverage||Profit $’s / Debt Payments||200%||Or Greater|
A healthy Balance Sheet can help you ride out a tough patch. It is by far the most under utilized and most misunderstood report with business owners. While we are just hitting a few a concepts at a high level, understand that if your Balance Sheet has errors on it your Profit Loss Statement is flat out wrong! Understanding the relationship of BOTH reports is where the cash flow light will go off! Stay tuned and I’ll tell you how much money guys are losing when they sell their companies because owners and their advisors don’t understand their Balance Sheets and the impact industry practices have on purchase price.