Lender Financial Indicators

In this economy, many business owners are worried that their business might be the next to fail.  However, this by itself should be no reason to panic.  Many individuals are uneasy simply because they are unsure of the true health of their company.  There are several financial indicators that small business owners should monitor, which will give them a good idea of the overall health of their business.

First, a concerned business owner should look at their gross profits (sales revenues less the costs associated with making those sales, i.e. cost of goods sold) and net profits (the money that is left after all expenses).  Comparing gross and net profits over time will allow business owners to see if their profits are increasing or declining. These trends can help business owners identify growing costs and inefficiencies in their business operation.

Second, free cash flows should be considered.   Measuring the “free” or real cash flows of a business allows business owners to see how much tangible cash is actually flowing in and out of their company.  Free cash flow is calculated as follows:

Net Income + Depreciation + Amortization +/- one time expenses or income gains

This will give you an idea of what free cash flow looks like excluding any anomalies in the given year. Lenders use this type of cash flow to determine likely future performance based on historical results.

These two indicators are by no means comprehensive, but will give business owners an idea regarding the health of their business.  Monitoring other accounting ratios and trends will also help business owners identify strengths and weaknesses within their business. If you don’t understand the numbers, consult a CPA, lender, or industry expert. Qualitative management is a good skill to master as a business owner.

Related Posts

Comments are closed.

business loan clients