I am always on my soap box about this. As entrepreneurs, we may not alot about our business but we know so little about the financial statements we need to run our business. Without numbers, we are constantly looking in the rear view mirror. We need to understand the Cash Flow Statement, the Balance Sheet and the Profit and Loss Statement. This is not optional- don’t be embarassed, go out and learn it.

Bookstrapper has a great links on this!

Within these statements, there are a few equations you should focus on:

Break Even Analysis– Look at your profit and loss. How much money needs to come in every month so you can pay all your bills? This is not product sold, this is payments received! This is a difficult time to borrow money so all businesses need to operate from their cash flow.

Quick Ratio: Look at your balance sheet- this is your current assets minus current liabilities. This is important since it is an assessment of your abililty to pay your bills. Banks are looking at this right now if you have borrowed money from them.

Borrowing Base: The sum of your A/R less than 60 days old times 80% (plus inventory sometimes). This needs to be less than your line of credit with the bank.

Gross Profit Margin: Look at the profit and loss statement. What is your sales minus the cost of goods/ services? In other words, what is the profit on selling the product before you have to cover your overhead? The higher the better- typically over 35%.. Obviously easier to make money the higher the Gross Profit Margin is.

Inventory Turns: Look at the balance sheet. How much inventory do you carry compared with your monthly sales? You want to “turn” or go through your inventory as quickly as possible because the more time it takes to sell it, the more cash you have in the business that you can’t get out.

Do you have a few you use in your business?