Cash is King

In business, as in the rest of our lives, finances, taxes, investments and cash flow demand a lot of our attention at this time of the year. The management decisions we made in the previous 12 months, and the hard work we did all year, will dictate whether that attention is a positive experience or a very stressful one for us now. You can minimize the stress and help to ensure financial security in the future by starting right now to maximize the opportunities presented at year-end.

Firstly, whether you are a sole proprietor or a corporation, there may be tax benefits, credits, deductions and programs that you are eligible for and may have missed in the past. Now is the time to educate yourself online, or with assistance from government offices or a tax accountant to make sure you don't miss out next year too.

Then talk with an expert about how to review your financial statements in order to understand the importance of the numbers your business is generating. In addition to understanding your sales, profits, assets and liabilities, you also need to be able to read between the lines of your financial statements. Ratio analysis can help you do that, enabling comparisons between companies, industries, time periods within your own company, and between your company and its industry standards. With this information you can recognize when something is off, and begin to dig for reasons behind the discrepancies, and develop solutions to resolve them. The following are generally considered the most important ratios to consider:

• Liquidity Ratios measure how readily a company can meet its obligations.
• Profitability Ratios give an indication of the earnings and profitability potential of a company.
• Asset Management Ratios gauge how efficiently a company can change assets into sales.
• Debt Management Ratios indicate how debt-leveraged a company is, and how it can manage the debt in terms of assets and operating income.
• Dividend/Market Value Ratios measure how well a company uses its assets to generate earnings.
• Profitability Ratios indicate earnings and potential profitability.

Plan to review your numbers monthly going forward, armed with your new-found knowledge and understanding. The sooner you can identify the red flags in your financial statements, and determine what is behind them, the sooner you can turn things around.

Finally, managing your cash flow is likely the single most important role you have as a business owner/manager. No business can survive for very long without generating a positive cash flow. In tough economic times, especially, it is ever more important to make sure you are doing a couple of key steps to stay viable:

1. Collecting on receivables in a timely manner
2. Taking advantage of tax savings, tax credits, and available government programs
3. Knowing your break-even point and ensuring you are meeting at least your minimum sales goals
4. Not spending what you don't have or can't predict to have.

Remember, cash is king. Ultimately, if you can't increase sales and/or cut expenses, borrowing money may not be a good solution to cash flow shortages. Better to manage proactively rather than reactively, and that means starting now.

Terri Plaxton Smith is the business consultant for the Greater Barrie Business Enterprise Centre, 24 Maple Ave., downtown Barrie. For information and assistance, call (705)720-2445. Watch for our column in the Huronia Business Times each month.