Improve Your Financial Vocabulary

Accounting is the language of business. About your accountant that only the pages of monthly reports as required to know the language. For many owners, which means buying a complete new vocabulary with terms like “gross margin”, “key performance relationship” and “business case.”

Unfortunately, many business owners are intimidated by the language or prefer to ignore. Ignore the financial performance of your business, delegate to an employee or outsource. Understand financial fundamentals gives owners a better chance of successfully meeting the challenge of the current economic climate.

Essential Requirements

In business, cash is king. If you have, you do not win. Positive coverage ratio of cash flow and debt are two key concepts to master the management of their financial soundness. Results of positive cash flow when the money it receives from its customers that the expenses you pay to operate the business. This is different from the gain or loss that you see on your statement, because the money they receive and pay bills is not the same as the income and expenditure. Anyone who is unable to collect on a bill means the difference.

Sometimes, companies borrow money to grow or to cover shortages in cash flow positive. Your ability to negotiate favorable terms will depend on the confidence of lenders in your ability to repay the loan. The coverage ratio of debt is a measure of the ability of the Company to pay your monthly bills. Investors look for companies that are profitable enough to provide a return on investment (ROI). Lenders, moreover, the use of coverage rate debt a company to decide whether to make a new loan or negotiate an extension of an existing note.

That is how a coverage ratio of debt to the work: if a company has to pay a dollar per dollar of debt, the ratio of debt coverage is 1:1. Most lenders require a coverage ratio of debt close to 1.25:1, ie, they expect $ 1.25 of revenue available to pay for each $ 1 of debt. A minimum debt coverage is often a commitment or promise, and the loan is included in the loan documents. Even if you make your payments, if the coverage of debt is less than the required proportion, you will be in technical default of its loan and the lender can call the note.

Liquidity ratios

Liquidity means the ability to meet the payment obligations of their current assets. Assets are generally regarded as cash and cash equivalents and other assets that are readily convertible into cash. As for balance, are generally included in current assets. Bonds that are considered are listed under current liabilities.

The two reasons that lenders will look at the current ratio and liquidity ratio. The current ratio is calculated by dividing current assets by current liabilities. A ratio of 2 or higher indicates that there is sufficient cash to meet current obligations. Current assets include non-cash items such as inventory. The current ratio means that the company could sell its assets in cash flow quickly through their book value, if necessary, to pay the bills. This is not always possible. The liquidity ratio is calculated by excluding a large number of non-cash items included in current assets. This is a best estimate of funds available to pay current bills. A quick serving more than 1 is desirable.

These relationships are often part of lenders clauses included in the financing documents. No minimum required to keep the proportions is a technical default on loans and lenders expect rapid action to remedy the violation. These relationships can be improved by reducing or increasing the liability of the assets. The sale of assets not used for long-term cash to pay current obligations or to obtain a long-term loan to pay current accounts both indices increase liquidity. Accelerate collection of accounts receivable, on the other hand, have no effect on the liquidity ratios. Accounts receivable and cash are both active in the short term so just convert a current asset for another. Relations remain the same.

Threshold of profitability and sales of this stock

Out of the balance of an enterprise is the amount of revenue needed to cover all fixed and variable expenses. Once equilibrium is reached, the revenue will only cover the additional costs that variable with all remaining funds will be nonprofit. Technically, until a company reaches its equilibrium point, has not made a profit.

A break lower breakeven is best. A firm lower its breakeven point by reducing fixed costs by reducing direct costs, or increase the selling price. Breaking understanding, even necessary, to develop rebate programs and plans appropriate pricing strategy.

Another important concept for any financial firm which grants loans to its customers is the sale of the day of outstanding claims. This tool measures the amount of time it takes to receive payment for the work you do. The longer it takes to collect its accounts receivable plus the probability that you write off bad debts. Pending sales days that I told the lenders and investors the effectiveness of the company is managing cash flow, credit and collections.

Conclusion

Many business owners do not go beyond the examination of financial statements prepared by its auditors. These reports are important, but only as a feedback mechanism of its past performance. The preparation of these financial statements primarily for tax on income. Business owners get the best value of these statements when they know how to use historical data to predict future performance computing ratios and key indicators. Then, you can actively direct their efforts to achieve its long term goals.