As small business owners we normally can tell if we have enough money in the bank to pay the bills this week, but what about for the rest of the month, or next month, or this quarter, or even for the coming year? As business owners it is not an easy thing to predict the future.
There is actually a very fast and reliable way to know this – it is called the Current Ratio. This Key Indicator takes your current assets and divides them by your current liabilities giving you a ratio which indicates if you have enough current assets to pay those liabilities. A ratio of one means you can pay everything you owe right now with the assets you have on hand right now. Go under one and you will need to find other ways to pay your bills – go over and you have excess funds on hand.
But what does that mean? If you start out with a negative .25 Current Ratio then you have the current assets (cash and cash equivalents) to pay all your bills including things such as payroll for the next quarter but you will have to generate more income to go beyond that. If your ratio is .25 positive you can pay your bills for this year and the 1st quarter of the next year and may mean you have to much cash on hand and need to consider moving some of that money into long term assets such as CD’s or securities. You might hear investors of big companies like Google or Apple are often concerned whether the company has too much or too little cash on hand. This is a good indicator of the health of the company.
Our new strategic analysis service can look at your Current Ratio as well as many other Key Indicators to help you determine if you have the funds needed on hand or if you might have too much cash on hand. If you would like to see a sample report or would like us to create one specific to your business, call our office or e-mail us to set up an appointment to get your analysis done. It is kind of like being able to predict the future; which would be nice to know when you have bills coming due soon!