There are an abundance of operational measurements you may use to manage your company: profit and loss statements, percent of sales, percent of value added, gross profit, etc. To understand the real financial health of your company, however, you need to look at its life blood: the balance sheet and cash flow. Cash flow is especially important, and is the overriding focus of banks, vendors, and prospective buyers, particularly in a challenging economy.
Consider these key indicators and their guidelines for success:
Now consider why it is vital to monitor these numbers:
1) Current Ratio. As the indicator of your working capital, this immediately tells banks and vendors if you can meet your operating obligations in a timely manner. Taken alone, current ratio is a snapshot of where you are, but when tracked over time, it also shows where you are trying to go. Achieving that gold standard of 2:1 gives you a lot of ability to withstand losses or even a down year. We recommend you monitor this monthly.
2) Debt to Equity. This leverage indicator reveals not only how much debt you have, but also your ability to repay it and to withstand a down turn. In a highly capitalized industry like commercial printing and packaging, we like to see 4:1 here; but for most industries a good goal is 2:1.
3) Cash Flow Coverage (Fixed Cost Coverage Ratio). This is perhaps the most important of your key indicators, and is the standard ratio used by banks to determine if you are generating enough cash to pay your notes. Most banks today may want this information on a continuous quarterly basis, or even a continuous monthly basis for troubled companies. Failing to meet this ratio because you have had a bad year results in a covenant violation, and opens up a real Pandora’s Box of potential actions by the bank (increased rates, penalties, restructuring your entire arrangement). We like to see our clients maintain 1.25 here, since the covenants in those bank agreements are typically 1.2 to 1.25.
4) EBITDA as a Percent of Sales. This indicator allows you to compare your company to others of your size in the industry. In the mergers and acquisitions arena for the printing and packaging industry, prospective buyers are looking for companies that are at least at the 10 percent minimum. This ratio is typically monitored annually, although it can also be done throughout the year.
Here’s the bottom line: If other people are constantly evaluating your company based on these ratios, why aren’t you? Monitoring these numbers and making timely adjustments should be an integral part of your company’s continuous improvement to keep it mean, lean, and thriving.
Stuart Margolis, CPA and partner at MargolisBecker LLC, provides information that helps firms operate profitably. The company is the purveyor of the industry’s “Cash is King”, and “Value-Added Principles of Management”, and compiles the annual Printing Industries of America Ratios, the industry’s premier financial benchmarking tool. Find information at www.myprintresource.com/10164246.