Health Check: Taking the Pulse of Your Business

Author: Sanjeev Chib

At this time of year, many small businesses are busy preparing/finalizing their year-end 2008 financial statements for tax purposes, for submissions to other parties (e.g. regulatory bodies), and for some, to measure the state of their companies. Periodically monitoring the health of your business is always a good practice, especially during these recessionary times. It may give you some real insights into your business, help you identify any problem areas and focus and plan for the future.

We’ve put together some key “health check” indicators that you can easily calculate which will enable you to take a pulse of your business, which we will discuss over the next few series of posts. The numbers used in the following calculations can be obtained from your financial statements, and in many cases from the reports you create in the Merang TravelOffice system. This is not an extensive list of all financial ratios available (you can do a google search to get more) but just some basic ones we thought would be useful.

Let’s get started with “Liquidity Ratios”.

What does it mean:
They are a set of calculations (financial metrics) that will give you an indication of your company’s ability to meet short-term debt obligations. Basically, this is done by comparing your company’s ‘liquid’ assets (i.e. cash, or those easily converted to cash, such as short term investments, accounts receivable, and other ‘current assets’) to your short-term (or current) liabilities. This information is available on your balance sheet.

Generally, the higher the value of the ratios means that your company has a larger margin of safety to cover these short-term debt obligations (i.e. the “healthier” you company is). A higher value means that you will be able to pay your short-term debts as they come due. A low value means that you will have a more difficult time paying your short-term debts and meeting the running/operating costs of your business.

We will present here three types of liquidity ratios:current ratio, quick ratio, and cash ratio:

Current Ratio measures the short-term solvency of your business.

Current Ratio = Current Assets / Current Liabilities

Quick Ratio is a measure of your company’s ability to pay short-term debts instantly.

Quick Ratio = (Cash + Accounts Receivable) / Current Liabilities
-OR-
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
(as travel businesses probably would not have any inventory, the first calculation is more useful).

Cash Ratio is very similar to the quick ratio, except it only includes cash or cash equivalents (e.g. short-term or marketable investments) in the calculation. It is again a measure of the ability to pay off short-term debts immediately, but is more conservative than the Quick Ratio.

Cash Ratio = (Cash + Marketable Securities) / Current Liabilities

Again, there may be other Liquidity ratios that you could also use. But we hope you find these basic ones useful. Over the next few posts, we will provide some other types of ratios that you may be able to use.

Time to Wrap-Up 2008 and Plan for 2009.

Author: Team Merang

Last year, we had posted details on things to consider for wrapping up the 2007 year. Many of you said that you found this useful, so we are reposting it here again as a refresher.

qComplete all outstanding sales invoices:
During the year, we all get busy focusing on sales, marketing, and other aspects of running our business. While ideally, you have been entering and reviewing sales invoices in the TravelOffice system regularly, you may have fallen behind leaving some invoices still in the “pending” or “review” status that should be “completed”.

In many cases, we have made reference to the Merang TravelOffice system. However, we believe these same ideas/steps may be followed to manage any business and ensure you have a smooth close and can plan your business for the future.

To ensure you maintain complete and accurate accounting records, monitor your receivables/payables, and can start fresh for next year, organize and complete any outstanding invoices for your business. Make sure you review each of these sales invoices to ensure that they are accurately and completely recorded and then mark them as complete if they meet your definition of “completed” invoices.

qReconcile your books:
Why reconcile? Reconciling your records ensures that your accounting records are accurate and complete, help you catch any mistakes or errors, and therefore better control your business. From the back-office module, you can reconcile all amounts received or paid to their source reports or bank statements. Here are some items that you should reconcile:

• Reconcile sales amounts received from your customers and deposited to your bank account (if applicable, these would be the amounts deposited into the Trust Bank Account). If these payments were charged to your customer’s credit/debit card, reconcile the amount received (net of any transaction fees) as per the TravelOffice system against the statements from your “Card Payment Processor”, and to the actual amount deposited into your bank account. This will ensure that you have received all amounts accurately from your card payment processor.
• Reconcile commission amounts received from suppliers to your bank statement (if applicable, these would be amounts deposited to your General Bank Account).
• Reconcile payments made to suppliers (either by cheque or company credit card) to your bank statement (if applicable, these would be amounts paid from the Trust Bank Account).

Once you have completed all necessary sales invoices, and reconciled the amounts received and paid to your bank statements, you can:

• If applicable, record any transfers made from the trust bank account to the general bank account in the TravelOffice system.
• Generate the Sales-Related Journal Entries and post them to your General Ledger.

qOrganize all expense receipts:
Hopefully, you already maintain separate folders to store receipts for your various expenses (such as rent, utilities, telephone, payroll, and internet). In order to save us time in tabulating all the various expenses, we also maintain a separate Excel file where we record these various expenses on a monthly basis. Within this Excel file, we maintain a separate tab for each type of expense and at the end of the month/year we simply take the totals and post it into our General Ledger system. We find that this works very well for smaller size organizations. If you would like a template copy of our Excel file, please send us a quick e-mail at info [at] merang.com and we will be happy to send it you.

In addition to these expenses, there may be other expense items such as depreciation or other write-offs of assets that you should also consider. You need to maintain accurate records of your fixed assets and properly calculate and depreciate these assets. Also, consider writing-off any receivable amounts that may not be collectible. From a tax perspective, these expenses may offset your income and help reduce your total tax owing. Therefore, proper planning can help you save money. However, do keep in mind that there may be differences in the calculation of these expenses for tax purposes versus for accounting purposes. You may need to check with your accountant for further details.

q Monitor the health of your business:
While you should be monitoring your business on an ongoing basis, this is a good time as any to take stock of your business. Through the TravelOffice system, you can generate various management reports to monitor sales activity, who owes you, and who you owe. You should also generate your financial statements (i.e. Balance Sheet, Income Statement, and Cash Flow Statement) and review these, after all journal entries have been posted.

There are various financial ratios (such as liquidity ratios, current ratios, debt-equity ratios etc.) and analysis that can be generated based on the information in these financial statements and reports that will provide you insights into the health of your business. We will very shortly be providing some more details on various “health check” ratios you can use to monitor the health of your business.

Monitoring the health of your business at this stage will help you plan and prepare better for 2009. You should also analyse other customer and marketing statistics of your business that will help you better focus your marketing efforts in 2009.