McDermott Financial Solutions | 4 Steps to Avoid Paralysis of Analysis
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4 Steps to Avoid Paralysis of Analysis

Your first quarter just ended. How was it? Any changes going on in your business? It’s easy for a business to do no analysis at all and assume whatever happens just happens. Others have spreadsheets ad nauseum and really can’t draw any meaningful conclusions. I call this paralysis of analysis. If you feel like you’re there, follow these 4 steps to draw some conclusions about your business.

It’s important to make your analysis simple by comparing first quarter this year vs. last year, or against budget or against industry peers if you have that data. As a business owner you care about 4 things:

Profitability, Gross and Net: Whether you’re ahead or behind last year or budget, ask yourself why. Whether you’re lagging peers or out-performing in every area, ask yourself the question why. Often, you will find that a price or volume increase or increased cost of sales or operating expenses will be the main offender. This step will give you the data to empower you to take action.

Activity: How are you doing in collecting your receivables or turning your inventory? Bankers say profits pay back loans, but actually cash does. Cash can come from profits but it can also come from collecting AR better or turning inventory faster. This data is critical to increasing your cash balance in the bank.

Liquidity: Speaking of cash, how many days of sales do you have in cash? 5 days, 20 days, more? Cash in the bank is a good measure, but so is your current ratio, which is calculated by current assets/current liabilities. Your number better be higher than 1, otherwise you’ve got problems.

Leverage: How much debt do you have in your business compare to your equity or net worth? Many business have the same amount of debt as they have equity, so their leverage ratio is 1:1. However, many business owners use debt to grow their business and also pull cash out when needed, a reduction in equity. If your leverage ever gets over 3:1, you are starting to get in to dangerous territory when you go to the bank to borrow or find yourself in a declining economy with a high level of debt.

Keeping it simple should get you out of paralysis of analysis and focus on what’s important. If you have questions or want to know how your company stacks up, please contact us for your report.

 

 

Bill McDermott
bmcdermott@mcdfs.com
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