Corporate Financial Health Analysis
Corporate Financial Health Analysis
Our corporate financial health analysis is a necessary service for business owners who want to stay on top of their current financial situation. Do you know where your business might be losing money? Where are you making the most profit? Is your profitability in the red or black? A corporate financial health analysis will examine every aspect of your business’ financial state and give you a firm understanding of your business’ financial health.
Knowing where your corporate financial health stands is good for more than just your bottom line: it can also help you resolve company tax problems or assist you if you plan on restructuring your company. If, ultimately, your corporate health analysis shows your business is unprofitable, we can help you shut it down or restart it as a new entity without your current tax problems following you into future endeavors.
To schedule your free corporate financial health consultation, contact us today.
What is a Corporate Financial Health Analysis?
A company’s financial position tells investors about its general well-being. A financial analysis of a company’s financial statements – along with the footnotes in the annual report – is essential for any serious investor wanting to understand and value a company properly.
Let’s face it, many business owners don’t completely understand or don’t have the time and experience to properly evaluate the financial health of their company. An in-depth evaluation of the financial and banking side of the business is essential for the success and growth of any business.
It is important for every business owner to learn and be familiar with a handful of key, easy-to-calculate financial ratios, this will help you gain greater clarity into both the relative strength of your business and the discerning minds of your financing partners and suppliers.
To understand your position, you must first measure it and then compare it to the norms for your industry.
- Current ratio (Current assets ÷ Current Liabilities)
Fortunately, this is the easiest to determine. Current assets include all assets that are expected to turn into cash inside of a year, these typically include cash, marketable securities, accounts receivable and inventory.
Current liabilities typically include accounts payable, budget payments and pre-purchase monies collected from your customers, the current year’s portion of debt payments, and amounts owed on bank lines of credit.
Both are commonly identified on balance sheets.
The current ratio is an indicator of your company’s ability to meet its short-term obligations. A high ratio is more favorable than a low one.
- Cash flow Leverage ratio (Total Funded Debt ÷ EBITDA)
Understanding your company’s total debt load in comparison to earnings is another vital metric you should know. A low ratio is more favorable than a high one. In this calculation, total funded debt means the total remaining principal obligations to banks and other loan providers.
EBITDA means earnings before interest, taxes, depreciation, and amortization for the most recent 12-month period and can quickly be calculated from your profit and loss statement.
Keep in mind that in a challenging year with weak earnings, you may experience a very high ratio. As such, examine this ratio over the course of several quarters or multiple years to determine if the trend is problematic. In such a case, action may be required to address the debt load or the profitability targets of the company.
- Debt service Coverage ratio (Net Operating Income ÷ Annual Principal & Interest)
Net operating income is typically listed on your income statement, but it is simply the income remaining after all operating expenses have been paid. Net operating income excludes the impact of extraordinary income or losses. Annual principal and interest may or may not be listed on your company’s financials, but it is easy to obtain from loan payment schedules for a given year.
With a focused effort you can obtain a meaningful snapshot of your company’s financial standing and gain insight into how your financing partners view your company. While financial analysis can be very complex, my experience has shown that starting with these three basic and easy-to-calculate ratios is an effective way to gain clarity. Extracting the fundamental strengths and weaknesses of your operation using these ratios leads to sound decisions regarding the establishment of profitability goals, margin setting, expense examination and interaction with financing partners.
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