Do you know how hot your company’s financial engine is running?
Countless executives operate with little or no understanding of their company financial performance. Sometimes they survive or thrive in spite of their lack of knowledge. Other times financial blindness leads to a wrecked company. Do not leave the money matters to the accountants. Business leaders in all functional areas can improve their chance of positive personal and business growth by establishing a basic understanding of financial performance indicators.
The primary financial gauges are:
Liquidity: The ability to pay bills as they become due. Current and quick ratios should be greater than one-to-one or you may soon find yourself unable to pay your bills.
Profitability: The return on assets indicator shows the amount of net profit on each dollar of assets. Some of those assets are purchased with equity and debt so the return on equity ratio reveals how much positive leverage the company is generating with borrowed funds.
Leverage: Debt used incorrectly can put your company into an unrecoverable skid. Stay away from credit crises. Keep a close eye on your leverage by using debt-to-equity, debt-to-capital and debt service coverage ratios.
Running a business is like driving a high performance sports car. The person behind the wheel needs to scan and react to the dashboard instruments. Avoid a business breakdown by scanning, evaluating and responding to changes in the primary financial indicators.