Financial Sustainability: Weatherproofing Your Organization
Financial sustainability has been a much greater focus over the past several years, but what exactly does that mean and what can you do to achieve this? When analyzing the financial position of your company, there are some basic areas to look at:
Current Ratio (Total Current Assets ÷ Total current liabilities): The current ratio is an indicator of the financial strength and solvency of the company. This ratio indicates the company’s ability to pay its short-term obligations. A common rule of thumb is that a ‘good’ current ratio is approximately 2:1 which means that the current assets would cover the short-term obligations twice over. Actions that can be taken to improve your current ratio include paying down debt, refinancing payables into long-term obligations (greater than one year), selling unproductive fixed assets that are being stored and not generating revenues, and monitoring and possibly reducing owner distributions.
Cash Flows from Operations: Believe it or not, it’s possible to show profit for the year but then realize that the cash flow provided by operations reflects that the operations actually used more cash then it generated. Ways to help turn operating cash flows from negative to positive include monitoring accounts receivables and ensuring that customers are paying according to their credit terms. The old adage “the squeaky wheel gets the grease” is true when it comes to accounts receivable. Be persistent with customers with outstanding balances and, if needed, work out payment plans and require deposits for future purchases from those customers. On the flip side, evaluate your own payables to make sure that you are taking advantage of the full time before payment is required. And when presented with the opportunity for a discount for early payment, take it! Other actions that could be taken would be evaluating the price points on your products or the necessity of certain operating expenses including staffing levels.
A couple other areas that will help to improve the financial position of the company include evaluating inventories that are not turning. If there are certain items that have not sold for long periods of time, consider scrapping and expensing those which would result in lower taxable income. Put your excess cash to work. If you have adequate cash on hand, consider opening a type of sweep account so that your cash is earning interest when not needed and is swept into an operations account when it is needed.
Financial sustainability is a continual process and includes many possibilities and unfortunately there is no “magic formula” for guaranteed sustainability. Each company and industry is different which means it’s important for each company to evaluate and determine what their weaker areas are that could really improve the company’s financial position.