Balance Sheet

The Cash Conversion Cycle

If you read my postings on a regular basis I may sound like a broken record with how much I focus on cash. But again, as I’ve said before, “Profit is nothing until it is converted to cash.” See Cash Flow – The Bottom Line. Now I want to delve into how efficiently we convert financial activity to cash.

Cash Conversion Cycle Formula

First we need to identify some abbreviations and definitions: Read the rest of this entry »


Importance of Free Cash Flow

In some previous posting I discussed how important it was to convert profits to cash. See Cash Flow – The Bottom Line for more on this. Now let’s look at cash from a different perspective.

Free Cash Flow Defined

Generally free cash flow is considered to be operating cash flow minus capital expenditures. This recognizes that capital spending for things like equipment is necessary if a company is to remain competitive. These capital expenditures help a company become more efficient or even allow them to Read the rest of this entry »


Productivity of Fixed Assets

I remember a client a few years ago who tended to make what he considered bargain purchases of equipment. Often the purchases were large enough that they needed to be capitalized. Unfortunately much of what he bought turned out to be useless and ended up sitting around the building like an over-grown paperweight. He may have still thought these purchases were a good idea, but they certainly weren’t producing a decent return. In fact, they were producing no return whatsoever and were nothing more than a waste of financial resources. So, what should you expect out of your fixed assets? Read the rest of this entry »


Two Measures of Financial Return

Recently I’ve been focusing on financial ratios and how they can help you measure performance. You’ve probably heard the old advice on a personal level, “If you’re not using something, maybe you need to get rid of it.” Another way to look at this is whether the benefits you derive outweigh the cost of ownership or produce a positive result. An example would be Read the rest of this entry »


Debt Coverage

In the posting Why Debt Ratios Matter we looked briefly at what debt really is, one way of measuring it, and how the mix of debt and equity played a role in how appropriately a business was financed. Now let’s look at servicing debt, also known as debt coverage.

What Determines Debt Coverage?

Think about this from a personal perspective. Imagine you took out a loan to buy some furniture for your home, and it was one of those loans where you only paid interest for the first year. Starting in the second year you would be required to start Read the rest of this entry »


Why Debt Ratios Matter

If you don’t have a handle on your company’s debt you may find yourself without a company. Here are a few things to consider.

Types of Debt

There are two sources of capitalization for a company. One is owner equity and the other is debt. First let’s consider debt.

Debt may be in a number of forms, with bank loans to bonds being among them. An asset-based loan could be from a bank or other financing organization and Read the rest of this entry »


Some Key Financial Indicators

If you are attempting to manage a business you must have timely and meaningful financial indicators. Many companies do this with some sort of financial dashboard, but whatever your method, here are a few things to be on top of.

Some Balance Sheet Data

Keep up with some key balance sheet data. This should be done at a minimum monthly, but preferably weekly or even daily, depending on the particular piece of information. Here are some of the key financial indicators to track: Read the rest of this entry »


Balanced Approach to Financial Management

I remember a partner in a small CPA firm telling a story from early in his career. He said he had been given the task of creating a balance sheet for a client. When it was in balance he declared, “It balances, so it must be correct.” Of course the balance sheet must balance, but he quickly learned there was a lot more to it than that.

Balance Does Matter

One of the first areas where a company often displays a lack of balance is on the importance of the different financial statements. The income statement shows the results of activities over a specific period of time, while the Read the rest of this entry »


Balance Sheet | A Different Look

When you look at a family photo there is something interesting that happens. While at first you may look at the group as a whole, if you look long enough you will invariably begin to think about specific individuals in the picture. You may think about the unique traits they have they you really like or even those traits that can drive you nuts. Do you sometimes find yourself thinking how much someone adds to your family? Perhaps you are even reminded of the challenges someone presents. So, what does this have to do with a company’s balance sheet?

The Balance Sheet in Total

At first glance a balance sheet may look like just a bunch of numbers, but we know Read the rest of this entry »


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