Jan 29, 2015Balance sheets, income statements, cash flow statements, footnotes and tax returns for the past three years are all key indicators of a
May 21, 20011. Income2. Cost of goods3. Gross profit margin4. Operating expenses5. Total expenses6. Net profit7. Depreciation8. Net profit
Financial factors consist of financial policies, financial positions and capital structure. It is an important internal factor which has a substantial impact on business functioning and performance. Financial facilities are required to start and operate the organization.
Accounts Receivable.
Uncollected receivables stunt a business's growth and could require unanticipated bank loans.
Look carefully at indicators such as accounts receivable turnover, credit policies, cash collection schedules and the aging of receivables.
Excessive Or Insufficient Inventory.
If the business is based on a product rather than a service, take careful stock of its inventory.
First-time business buyers are often seduced by inventory, but it can be a trap.
Excessive inventory may be obsolete or may soon become so; it also costs money to store and insure.
Excess inventory can also mean there are a lot of dissatisfied customer.
Fixed Assets.
If your analysis suggests the business has invested too much money in fixed assets, such as the plant property and equipment, make sure you know why.
Unused equipment could indicate that demand is declining or that the business owner miscalculated manufacturing requirements.
How do I analyze the financial health of a company?
No single ratio or statement is sufficient to analyze the overall financial health of your organization.
Instead, a combination of ratio analyses across all statements should be used.
Understanding the financial health of a company is critical for all professionals:
business owners entrepreneurs employees and investors. How do you determine your financial needs?
Factor in both short-term and long-term expenses to gain a holistic view of your financial needs.
Remember that selling more goods will, obviously, require more capital as your cost of goods sold increases.
The timing of expenses and revenue is often very different.
Most businesses require paying expenses before receiving or earning revenue.
Net Income.
Use a series of net income ratios to gain a better look at a business's bottom line.
For instance, the ratio of gross profit to net sales can be used to determine whether the company's profit margin is in line with that of similar businesses.
Likewise, the ratio of net income to net worth, when considered together with projected increases in intere.
Sales activity.
Sales figures may appear rosier than they really are.
When studying the rate of growth in sales and earnings, read between the lines to tell if the growth rate is due to increased sales volume or higher prices.
Also examine the overall marketplace.
If the market seems to be mature, sales may be static—and that might be why the seller's trying to un.
The Lowest Level of Inventory The Business Can Carry.
Determine this, then have the seller agree to reduce stock to that level by the date you take over the company.
Also add a clause to the purchase agreement specifying that you're buying only the inventory that's current and saleable.
What financial factors should you consider when hiring a management team?
There are multiple financial factors to consider, ranging from ensuring you have sufficient savings and income for your personal needs to verifying the management team has the resources and plan for continued business success—and more.
Working Capital.
Working capital is defined as current assets less current liabilities.
Without sufficient working capital, a business can't stay afloat—so one key computation is the ratio of net sales to net working capital.
This measures how efficiently the working capital is being used to achieve business objectives.
