Focus on Efficiencies: NOW! more important than ever
In past posts we have addressed the importance of conserving working capital to help with future difficult times…specifically, we said “Building up your working capital to weather hard times is best when businesses are thriving. When they are struggling it is too late. The key is to build cash reserves to cover fixed expenses when sales and profits drop off.”
We sincerely hope that you were in a position to heed that advice. However, if your business now finds you in a difficult financial position, your Profit Gap Financial Analysis remains an important tool for managing your way through these difficult times. Your reports will help you:
Focus on Efficiencies
The COVID 19 Pandemic is an appropriate time to focus on efficiencies. In what is a difficult time for small businesses, your Profit Gap Reports will be very useful to help manage your balance sheet ratios and minimize your cash conversion cycle.
Here is a short list of suggestions:
- On you Scorecard: Monitor your Balance Sheet Ratios carefully.
- Current Ratio…do what you can to manage your current liabilities by stretching out payment days and possibly having a chat with your landlord to negotiate a rent deferment or reduction.
- Quick Ratio…conserve cash, as much as possible. This may mean a short-term reduction in payroll. Or, take look at receivables accounts and work to accelerate collections.
- Debt-to-Worth…If current government programs are available to your business, consider adding to your debt load, especially if current terms are favorable.
- Trend Charts can be helpful:
The Trend Charts of your Profit Gap Financial Analysis give you some insight into your current working capital position and other opportunities:
- The “Working Capital” chart indicates your working capital trend
over the last 13 months.
- The ‘Working Capital Turnover” chart indicates your company’s Working Capital annual turnover as a two-month rolling average for current assets and liabilities to smooth out sudden changes. The benchmark is set at ten times annually. Notice the trendline that will show if your company is improving.
- The “Days of Working Capital” trend chart indicates your company’s days of working capital. This is a rolling two-month average for current assets and liabilities to smooth out changes. The benchmark is set at 37 days. There is also a trend line that will show if your company is improving.
- The “Days of Cash + Receivables to Cover Expenses” is the number of days of Cash plus Receivables remaining to cover Expenses if no sales occur. During this COVID 19 Pandemic this is your most important metric if your business has had a significant sales reduction. Working Capital which is Current Assets – Current Liabilities assumes your Current Assets can be turned into liquid assets to pay your bills. But during these times assets like Inventory are very difficult to convert into cash unless you can return the inventory to the supplier.