How do I determine the financial strengths and weaknesses of my company? Response: The best way to do this is to measure your financial data and then compare it to other companies in the industry. The four things that you are trying to determine include: 1) is your firm financially liquid, 2) are there adequate operating funds, 3) is the company getting the most from its assets, and 4) are your investors (possibly you) receiving return on investment. This is usually accomplished through the analysis of financial ratios. The first question concerns the ability of your company to meet expenses and have money left over for emergencies or opportunities. Can you meet your debt payments? One way to determine this is through a current ratio. A current ratio is simply current assets divided by current liabilities. In other words, can the assets on hand meet the current responsibilities of the company. Since there are three categories of current assets: cash, accounts receivable, and inventories, many companies use the acid-test ratio, which excludes inventory. By dividing assets minus inventory by liabilities, you get a view of the firm that provides a better picture. Therefore if your acid-test ratio measured at 0.50, you would have 50 cents in assets for every $1 of debt. As we look at the various ratios, it is important that you know the industry average because every business is unique and the determined ratio may be fine in your industry. However, if you are weak in a financial arena, it allows the competition to take advantage of your cash flow weakness. It is all about measuring your financial position to beat the competition. Another valuable liquidity ratio is the average collection period of accounts receivables. This ratio is found by dividing your accounts receivable by the daily credit sales. This will give you the average days it takes to collect receivables. When compared to your competition, you can determine if you have an advantage or if your company is losing money. Remember that a dollar in your hand is more valuable than a future dollar. You also want to measure accounts receivable turnover by dividing credit sales by accounts receivable. This will tell you how many times your credit accounts turn over during the year. To determine the effectiveness of your inventory, divide the cost of goods sold by your inventory. The importances of this, as with all ratios, are determined by your industry. Each industry average is different and your knowledge of the industry will help extensively. Check with your trade association for these statistics. A popular method to determine if you have adequate operating profits is the operating income return on investment ratio. This is obtained by dividing operating income by total assets. Another ratio is total asset turnover accomplished by dividing sales by total assets. Operating profit margin is found by dividing operating income by sales. Two ratios are used to measure how the company manages debt. The debt ratio is obtained by dividing total debt by total assets. Times interest earned is measured by dividing operating income by interest. This information will help you determine how well the company is financed. How do you measure to other companies in regards to debt versus equity? The last question deals with return on investment for your shareholders. Understanding that this may be you, the ratio is called return on common equity. This is measured by dividing net income by common equity. Hopefully, the percentage is high. A good rule for this is that it should be higher than you could receive if you invested the money somewhere else. That is, if you are making 5% and could invest and receive 8%, there is a lot of risk and work for less money. That is, unless the long term prospects look good even though the short term is weak. This article is too short to explain all of the details of ratio measurement. Additionally, there are many other financial ratios that are important to your business. If you measure your finances and compare them to the industry average, it allows you to use your strengths and opportunities to create a competitive advantage. It also allows you to work on your weaknesses and threats. The bottom line is that knowledge is power and the more knowledge you gain through measurement, the better you can manage your company. Cite and discuss an example of how this concept can be utilized.........