Financial Ratios: The Early Warning Indicator of Business Health

Guest Blogger Series Part 4: For the past 30 years, Professor Bornstein has been a tenured Professor of Accounting and Taxation, and for the past 32 years a CPA and Consultant in public practice for Bornstein & Song, CPAs & Consultants.

The current economic downturn requires a careful understanding of where the business is, where it has been, and where it is going. Cost cutting measures may be required for business survival. There are financial tools that can help.

Just as people monitor their health with blood tests, electrocardiograms, blood pressure readings, and other measurements that provide early warning indicators of illness, businesses must establish financial health measurement mechanisms that monitor their survival, profit, and growth. Such mechanisms can predict and head off small business failure.

Knowledge and understanding of accounting and its analytical tools and techniques, such as financial ratios, can help business owners diagnose, identify, and cure financial weaknesses. Financial ratios transform accounting data into useful data for business decision making, and they can reveal more than just the bottom line. These ratios may tell more about the true health of a company than actual sales and profit figures that appear in financial statements.

Financial ratios can help determine which direction the business is going by measuring the following aspects of the business: (1) Liquidity ratios measure the ability to meet the cash flow needs as they arise; (2) Profitability ratios measure the overall performance and its efficiency in managing its assets, liabilities, and equity; (3) Activity ratios measure the liquidity of specific assets such as accounts receivable and inventory; (4) Leverage ratios measure the ability to meet its debt obligations and avoid bankruptcy. Businesses can compare their financial ratios to the averages in their industry. These comparisons can be vital to evaluating business performance.

Various publications and internet websites provide industry financial ratios: Annual Statement Studies published by Risk Management Association (RMA) provides ratios for over 500 different industries, while Financial Studies of the Small Business published by Financial Research Associates specializes in small to mid-sized businesses.

Financial ratios are extremely valuable analytical tools which can indicate areas of potential strength or weakness, however, their interpretation requires professional attention. The calculation and analysis of these ratios should be an integral part of the services provided by the business’s accountant.


Samuel D. Bornstein is a Professor of Accounting and Taxation, at Kean University School of Business, Union, NJ., and managing partner of Bornstein & Song, CPAs & Consultants in Oakhurst, NJ. Email: bornsteinsong@aol.com

Thanks Professor! Be sure to check back in for Part 5: GrowMap's Gail Gardner!

MerchantCircle Guest Blogger Series

As technology, the web, and the tools to drive more customers to your business evolve, we’ve compiled a group of experts in various fields to help you navigate the changing field of play. Over the next 3 months (starting in May), be sure to check back at the beginning and middle of each month for a new guest contributor post. We’d like to introduce the first group of contributors:

• Andrew Shotland – Local SEO Guide - I currently provide clients with SEO and SEM consulting services. I specialize in local search engine optimization but I work on all types of sites. Clients include large media and e-commerce companies, Web 2.0ish start-ups and even my local cabinet guy (I got a great deal on custom cabinets).
Previously I was head of product and business development for Insider Pages where I developed a SEO program that attracted over 3 million monthly unique visitors almost solely via SEO. In a past life I was GM of NBC.com.

• John Jantsch – Duct Tape Marketing - John Jantsch is a marketing and digital technology coach, award winning social media publisher and author of "Duct Tape Marketing - The World's Most Practical Small Business Marketing Guide".

He is the creator of the Duct Tape Marketing small business marketing system and Duct Tape Marketing Authorized Coach Network.

His Duct Tape Marketing Blog was chosen as a Forbes favorite for small business and marketing and is a Harvard Business School featured marketing site. His blog was also chosen as "Best Small Business Marketing Blog" in 2004, 2005 and 2006 by the readers of Marketing Sherpa.

• Dane Carlson – Business Opportunities Weblog Network - I own the Business Opportunities Weblog Network, the most popular niche business blog network.

Dane Carlson's Business Opportunities Weblog is the premier blog of ideas and opportunities for small business entrepreneurs and is one of the most widely read business blogs. In over ten thousand posts since 2001, author Dane Carlson has proven the notion that "ideas are cheap," and pushed hundreds of inventors, entrepreneurs and small scale capitalists towards their dream of owning and running their own business.

• Samuel Bornstein – Kean University School of Business - For the past 30 years, Professor Bornstein has been a tenured Professor of Accounting and Taxation, and for the past 32 years a CPA and Consultant in public practice for Bornstein & Song, CPAs & Consultants.

Since 2000, Professor Bornstein has researched the causes and solutions to Small Business Failure and Financial Literacy. His research evolved into a study of Small Business and the Subprime Mortgage Crisis. Prof. Bornstein’s research determined the most effective content for “Specific and Immediate Financial Guidance” as a solution to this crisis. His focus has been to research "Artificial Intelligence" as an effective delivery system for Financial Literacy Education for Small Business, Adults, and K-12.

• Gail Gardner – GrowMap - Gail has been involved in the computer industry since the late 1970s, originally servicing hardware, and as a Project Manager for data processing centers, banks, and retailers.

Since 2003, she has worked exclusively in online marketing, specializing in optimizing blogs and ecommerce sites, pay per click advertising, and Local Search listings.

I hope you will find the guest blog post rewarding and educational.

Sincerely,
Community Relations