Business Tip of the Month from Anita T. Conner and Associates

Balance sheet analysis provides planning opportunities

Learn to dissect your company's balance sheet to discover opportunities for growth, imminent shortfalls, financial disasters in the making, and trends both favorable and unfavorable. To jumpstart your analysis, focus on the following key indicators.
Current ratio. The current ratio is calculated by dividing current assets by current liabilities. Current assets generally include cash, investments, short-term accounts receivable, inventory, and supplies. Current liabilities includepayroll and other short-term payables, as well as current payments on long-term debts such as mortgages or bank loans. These accounts are classified as "current" because you generally expect to convert them to cash or pay them off within a year or during the current business cycle. For example, you might buy inventory on credit and plan to pay suppliers using proceeds from current sales. The rule of thumb: If your company's current ratio is greater than one, you have enough short-term assets to cover short-term obligations. If the number dips below one, your business may be headed for trouble.
On the other hand, if the current ratio is three or above, you could be neglecting profitable investment opportunities. For instance, you might have too much money sitting in a low-interest bank account when the funds could be used to develop a new product line, liquidate long-term debt, or invest in a more lucrative venture.
Working capital. Subtract current liabilities from current assets to arrive at this number. Like the current ratio, working capital indicates whether your company has enough cash (and short-term assets that can be converted to cash) to meet current obligations. Banks analyze this number because they're reluctant toloan money to a business that's barely covering existing commitments. The greater the amount of working capital, the more likely your company will make payments when due.
Debt-to-equity ratio. You can calculate the debt-to-equity ratio by dividing total liabilities by total equity (assets minus liabilities). The debt-to-equity ratio indicates whether your company is relying excessively on debt to finance current operations. Like the spendthrift who finances an extravagant lifestyle with credit cards, a business that's heavily leveraged may find itself careening toward bankruptcy. Analyzing this ratio can help you make needed corrections before it's too late. Generally speaking, the lower the percentage, the stronger your company's financial health.
For help analyzing your company's financial statements, give us a call.
© MC 2016

aconner@atconnercpa.com

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Financial Tip of the Month from Anita T. Conner and Associates

Trim the fat from your grocery bill

Looking to save money on household expenses? Start with your grocery bill. Here are eight ideas for reducing how much you spend on food.

• Make a list. By deciding ahead of time what's needed for upcoming meals, you'll be less likely to buy on impulse.

• Buy generic. Thanks to advertising and packaging, brand differences are often more perceived than real. Blind taste-comparison tests have shown that study participants often can't tell the difference between well-known and generic brands. That's especially true with staples such as salt, sugar, and other baking supplies. Be willing to experiment. If you try a product and aren't satisfied with quality or taste, you can always purchase a more expensive brand on a subsequent trip to the store.

• Go simple. Think salads, one-dish casseroles, and in-season fruits. You'll avoid the trap of eating pre-packaged, less nutritious, and more expensive meals.

• Pay with cash. Research studies show that paying with a credit or debit card lessens your perception of how much you're spending. Pull actual currency from your wallet and you may find that impulse purchases aren't as tantalizing. Stay within budget by bringing only as much cash as you need.

• Shop at the edges. In many stores, the produce, dairy, and meat departments are located on the perimeter. Snacks, canned goods, and pre-packaged meals are stocked in the center aisles and toward the front of the store. Buy items mostly from the outside edges and your meals will be healthier and cheaper.

• Scrutinize unit prices. Don't buy items based on total cost alone. Instead, compare unit prices, which tell you the cost per a standard weight or volume. Larger doesn't always mean cheaper.

• Eat first, shop later. That candy bar or bag of potato chips won't be quite as appealing after a full meal.

• Try a different establishment. If you frequent a particular store out of habit, don't be afraid to shop around.

For more budgeting and money-saving tips, contact us.

aconner@atconnercpa.com

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