Don’t Be So Frugal Today That It Costs You Your Company Tomorrow
I received a call from The Boss of a mid-sized company who wanted to talk with me regarding his cash flow challenges. I was referred by his lender who noticed that despite the company’s good revenues and decent net profit The Boss was always experiencing cash flow issues. I asked to see two years of financials and I did an indirect cash flow evaluation on his business along with calculating what I consider the top fourteen ratios I use to evaluate the financial health of an organization. What I found was the company had good operating profit which meant the organization was generating a healthy sustainable cash flow. I told this to The Boss who immediately asked me; “If I have such good operating cash flow, why do I not have money?” The answer was in the ratio analysis. When I calculated the Return on Total Assets, ROA, I found the ratio to be very high, too high for this type of business. I began to ask The Boss a few questions regarding his building and equipment. Now, The Boss was a very frugal man, in my opinion too frugal for the health of the organization. The Boss would try […]