In the July/August issue of Floral Management, floral financial expert Derrick Myers, CPA, CFP, PFCI, shares ways to evaluate the health of your business.
An annual physical is key to catching any hidden health issues. Your business deserves the same regular checkup. In the July/August issue of Floral Management, floral financial expert Derrick Myers, CPA, CFP, PFCI, shares what vital signs you should evaluate and how to do so.
Most doctor appointments start with a blood pressure check. The business equivalent is assessing your cash flow, says Myers, president of Crockett, Myers & Associates, Inc., a financial management and accounting firm that has worked with florists for more than three decades.
“Without cash flowing properly through your business, it will eventually die,” Myers says. “You need to monitor your profit, which is the indicator of new blood being produced.” Too low a profit means cash is running out and you may need an infusion in the form of a loan. Too high? You could have too much cash in the business, exposing you to creditors in the event of a lawsuit. “Maintaining the correct amount of cash in your business is crucial to your ability to survive and grow,” he says.
There are several tests you can quickly run to check the cash levels in your business. Start with the current ratio test, which compares your current assets (cash, accounts receivables, and inventory) to your current liabilities (accounts payables, taxes payable, and other short-term debts.) The formula is simple: Current assets divided by current liabilities equals the current ratio. “You are hoping to see a number somewhere around two, or a ratio of 2:1,” Myers says. “This means that you have enough current assets to pay your current liabilities two times over.”
Some other cash flow tests include inventory returns (to identify how much cash is tied up in inventory) and accounts receivable turns (to see if you need to work on collections). For details on these and other vital signs, read “Is Your Business Healthy?” in Floral Management.
Katie Vincent is the senior contributing editor for the Society of American Florists.
