■ Shop Management
Set yourself up for success by ensuring you know how to interpret and understand your company’s financial statements. By Ron Coleman What good is a tool if you don’t know how to use it properly? Your business isn’t any different. Understanding how your business operates, from a financial perspective, is key to running a successful business. In the previous article, we explored the structure of financial statements; now, it’s time to interpret them. The best approach is to know what exactly you are looking for; it is surprisingly simple.
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Plumbing & HVAC – September 2021
profit, vary from one trade to another, the type of work done, and the size of the company. The targets that are here are the minimum industry standards recommended by financial institutions and bonding companies. There are only four outcomes you need to measure to stay in control of your finances. 1. Liquidity—determines if you can pay your bills on time. 2. Leverage/solvency—determines your level of debt and how healthy it is. 3. Activity—shows how actively the company is managing its resources. 4. Profitability—we are in business to make a profit. Liquidity, activity, and leverage ratios are constant for differing types of contractors. An exception being sheet metal contractors who have substantial capital (fixed) assets. Profitability ratios, except for net operating
Formula:
Current Assets Current Liabilities
=
Current Ratio
Current ratio (target is greater than 1.5:1.0).
Liquidity ratios A current ratio is used to determine the number of times current liabilities can be paid by dividing assets by liabilities. A 1.5 to 1.0 current ratio is considered the minimum standard. You need a minimum of 50 per cent more in current assets than in current liabilities. With a ratio less than 1.5 to 1.0, the contractor may have difficulty meeting current obligations.
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