Christmas in July mid-year financial review

As the adage goes…the business world is filled with three types of business owners:

1. Those who make their business profitable

2. Those who watch their competitors earn a profit

3. Those who wonder if their business is or will ever be profitable (and are afraid to find out)

Which type of business owner are you?

No matter your industry, now is a great time to at least eliminate Choice 3. Not knowing the condition of your fiscal house is NOT an excuse. It is SO easy to take your company’s vital signs and forecast the likely financial performance of your enterprise. You truly owe it to yourself and those who rely on you to run a profitable business.

I encourage you to take a few minutes to make a handful of easy calculations that provide you with fact-based insights to the financial health of your business.

To get started, gather the following information to prepare your mid-year analysis:

• Income Statement for the last calendar year (remember the Income Statement is for a PERIOD)

Note: The Income Statement is also referred to as the Profit and Loss (P&L); Statement of Income; Earnings Statement etc.

• Balance Sheet as of a POINT in time – for this process you will want to use the last day of the period for the Income Statement above (keep in mind the Balance Sheet is a snapshot AS OF A SPECIFIC DATE)

• Income Statement for the first half of the year: January 1, 2023, through June 30, 2023

• Balance Sheet as of June 30, 2023

Once you have this information follow these easy steps to learn AND understand:

1. Where your business stands financially

2. What will the full year likely turn out to be profit wise

3. What your financial goal are for next fiscal year

To the right, I have created a step by step example of the basic calculations I want to guide you through for your own business. See the instructions that follow the example.

STEP A

From the Income Statement for last year enter the info as indicated above (I have used a fictitious business to illustrate the calculations).

STEP B

From the Balance Sheet as of December 31, 2022, enter the info and confirm your Balance Sheet balances (Total Liabilities plus Net Worth MUST EQUAL Total Assets).

Step C

Now we will project how we expect the current year to END financially. PLEASE BE CANDID WITH YOURSELF. Make your estimates as realistic as you can; you are only fooling yourself if you “hope” things will get better.

You can take the first six months of actual performance and determine how this year will look compared to last year. When you project your cost of goods sold/cost of sales you can calculate your Gross Margin Percent and see if this year is going to be better/worse/the same as last year. Just these basic calculations will give you an insight to your business’ health compared to the prior year. The business example I have created shows this business is going from break even to losing money.

Step D

This step lets you focus on how your asset and liability accounts are performing – good news is you still have half a year to make some course corrections and model how they would impact

For more Petrick, see page 9 your full year results.

Now the most important analysis will give you powerful indication of the REAL health and wellbeing of your business finances.

Grab your calculator for the next few steps.

Step E

There are many financial ratios and indices used across various industries. I encourage you to begin with the most fundamental measures to learn about and manage your business. Sort of like starting with blood pressure, heart rate, and temperature when you go to the doctor. We can always dig deeper as/if needed.

CURRENT RATIO: CURRENT ASSETS/CURRENT LIABILITIES = CURRENT RATIO

Read the result as “for every $1 of current liabilities (bills due in the next year) I have $X.XX available to pay it”. In this case (last year), for every $1 of bills this business has $1.25 to pay them. As you can imagine, the more money there is to pay the bills the better – the more “liquid” your business finances are.

WORKING CAPITAL: CURRENT ASSETS – CURRENT LIABLITIES = WORKING CAPITAL

Naturally, the amount of working capital a business has is a good measure of its liquidity, efficiency, and overall financial health.

DEBT-TO-WORTH: TOTAL LIABLITIES/TOTAL NET WORTH = DEBT-TO-WORTH RATIO

This measure indicates the amount of leverage in the business — the lower the ratio the more of your business YOU own (less debt/ leverage).

INVENTORY TURNOVER: COGS/Inventory = Inventory Turnover (number of turns)

This is a critical measure for a business that sells products – it measures how efficiently the business turns inventory to cash.

Note: The “inventory” used in this calculation should be the average inventory level at (your cost) held by the business. For last year we could say “we turned our inventory four times.”

GROSS MARGIN RETURN ON INVESTMENT (GMROI): GROSS MARGIN ($)/AVERAGE INVENTORY AT COST = GMROI

GMROI measures the ability for the firm to turn inventory to cash! One of the most important goals of the business is to efficiently and quickly turn inventory to cash. The way to interpret the GMROI is that a ratio higher than one means the firm is selling goods for more than it costs the firm to acquire it. A common goal in a retail setting is a GMROI of 3.2 or higher to ensure overhead and profit are covered.

Step F

1 Higher is BETTER

2 Lower is BETTER

Now, project the end of the year ratios based on the first half actuals AND any changes you implement during the second half. Follow the same formulas – make sure you document your assumptions and take the improvement actions you identified based on the first six months of actual financial performance this year.

For more Petrick, see page 11

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