Ruth King Discusses Financial Benchmarking
She noted that benchmarking “forces you to look at financials, helps spot minor issues before they become a major crisis, forms a basis for comparison, provides for better profitability, and draws attention to the things that really matter.
“What you pay attention to generally gets better - it’s not rocket science.”
She said some traps that business owners fall into is thinking they are profitable because they have a lot of cash, but that is not so. King asked, “Do you have enough cash to pay all of your bills? You should have at least two months of cash without depending on any more cash coming in. The choice is yours and it depends on what you are comfortable with.
“A rule of thumb is that if you are a $100,000 company you should have $10,000 on hand.”
If the ratio of cash to revenue is out of whack it, might be due to having too much debt, lack of productivity, high inventories, and slow collections. She told of a seemingly successful client who didn’t have money to pay her bills so King “made” her take a bookkeeping class. The advice worked.
She said a good ratio of current assets to liabilities is 1:8, which means that for every dollar an owner has in liabilities, he or she should have $1.80 in current assets. Increasing the ratio may also increase the profitability. King also cited several other ratios that business owners should keep abreast of including inventory-current liabilities; accounts receivable-accounts payable; debt-equity; long term liability-equity, etc.
In order to have healthy ratios as a part of financial benchmarking, King suggested ways to increase cash flow and revenues. She is a proponent of using service and maintenance agreements as a good source of cash flow. “The money you collect for service agreements should go into a separate account because it is for work you haven’t actually performed yet,” she said. “Call it your rainy day fund.”
She also said there are ways to increase revenues without increasing costs. One of the most logical ways is to increase closing rates on each sale because this increase does not add any costs and is a better alternative to decreasing prices in order to increase sales.
In closing, she added that another source for increasing revenues at little or no extra expense is by using current customers to bring in referral business.
“Why not use a happy customer to bring in new business?” she asked.
Publication date: 03/03/2008