Posts Tagged ‘finance’

Understanding the Debt Ratio

Most of my recent postings have concerned how businesses are financed and how to measure the returns on those investments. Understanding the debt ratio will help you better understand the financing of a business.

What is the Debt Ratio?

The formula for calculating the debt ratio is:

Debt Ratio = Total Liabilities / Total Assets

(Note that this is expressed as a percentage)

Using a sample balance sheet from an earlier posting, let’s see that calculation. Read the rest of this entry »

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What is Debt Really?

Take a look at your company’s balance sheet and see if you identify everything that is debt. Is there anything hidden?

A Simple Example

Let’s consider the balance sheet below and see if we can form some conclusions.

what is debt

When we look at this balance sheet we could come to several conclusions. One, we might consider debt to be only Read the rest of this entry »

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Think Twice About Debt

Christmas has just passed and soon people will begin to see the consequences of their gift giving. Some of course have been very disciplined by either paying with cash or at least knowing they had the funds set aside to pay their credit card bill in total. Those who cannot pay their bill in tota Read the rest of this entry »

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Budget, Spending Plan or Rolling Forecast?

In essence a budget is an estimate of expected income and expenditures over a specific period of time. The level of detail varies from company to company. Budgets may be created for a month, year, or even several years. Let’s face it though, when attempting to budget several years out the reality is very suspect, especially with how fast things change now. Also, I’m amazed at how often a lot of time may be devoted to preparing a budget, only to find it is never really used.

Another problem with budgets is that they can sometimes be unrealistic for several reasons. One, it could be just the Read the rest of this entry »

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Business Plan Benefits

Where is your company headed? You may be familiar with the quote from Lewis Carroll, “If you don’t know where you are going, any road will get you there.” Actually this is a paraphrasing of a conversation in Alice and Wonderland between Alice and the Cheshire Cat, but it sums up the idea nicely. Take this to heart when making decisions for your company. Have a business plan. Your plan may be extremely detailed, but along with it have a shorter version that is easier to refer to on a regular basis. See The Business Plan – Hold On to the Napkin for more on this. Here are some key reasons a plan (particularly the shorter one) is so helpful.

Decisions

One of my favorite humorous quotes is from the great ex N.Y. Yankees catcher Yogi Berra. “When you come to a fork in the road, take it.” Like many funny quotes this one Read the rest of this entry »

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Current or Long-Term Debt

There are many ways for a company to get into financial difficulties. One that is very common is misuse of debt. In a past blog, the risk of allowing accounts receivable to become overdue was discussed (see 3 Reasons Past Due Receivables May be Worthless). Also, in the blog posting 80/20 Rule for Receivables Management a way to help manage receivables was discussed. Another leading cause of financial distress is the mismanagement of inventory. See 3 Low Cost Sources of Cash – Part 1 for an example of the impact of this.

The problems of excess receivables and inventory are relatively easy to understand. But, the misuse of debt is a little more hidden.

What Kind of Credit Problem?

When people think of credit problems they are normally thinking in terms of Read the rest of this entry »

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Prepare for a Rainy Day

While reading an article about the funding levels of various cities around the county to finance future retirement and medical benefits, it was shocking to see how many had very little set aside. Some even had nothing funded for health care. This is a potential disaster that threatens the financial stability of these cities. In fact, if a city fails financially the repercussions will impact other areas of society as well.

What Does The Have to Do with Me?

These cities were so caught up in appeasing the present needs and wants of people that they failed to look to the future. Notice the word wants in the previous sentence. This is highly likely a lot of what caused this problem of not being able to Read the rest of this entry »

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Why Are You in Business?

Have you ever stop to consider the question as to why are you in business? Typically the answer to that question is something like, “I was tired of working for and making money for other people” or “I wanted to be independent” or “I thought I could make more money with my own company.” While all of these may be valid, I believe each of them leave a business owner exposed to Read the rest of this entry »

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How Time Erodes Your Profit

You’ve probably heard that time heals all wounds, but when it comes to the finances of your company the passage of time can inflict serious wounds.

Financing

How is your company financed? Is it internally, a line of credit, long-term loan(s), or some combination of methods? Regardless of how you finance a company, the passage of time can erode your ability to Read the rest of this entry »

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The Over 90 Days Customer

Every business that sells on credit has had, has, or will have them at some point “Those customers who think your purpose is to bankroll them”. Here I am primarily talking about the customers whose accounts receivable with you are routinely over 90 days. I recognize that in some industries that over 90 days is the norm, but for most businesses, once a customer’s account gets to 90 days, there is a high likelihood that what they owe will become a bad debt. I touched on this in an earlier blog, 3 Low Cost Sources of Cash – Part 2, but here I want to delve into this in more detail. Read the rest of this entry »

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