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DATA GATHERING FORM

CRITICAL DATA FOUND on THE BALANCE SHEET

  • CASH
  • CURRENT ASSETS
  • CURRENT LIABILITIES
  • WORKING CAPITAL
  • CASH EQUIVALENTS
  • MARKETABLE SECURITIES
  • ACCOUNTS RECEIVABLE
  • INVENTORY
  • OTHER CURRENT ASSETS
  • FIXED ASSETS
  • ACCUMULATED DEPRECIATION
  • NET FIXED ASSETS
  • INTANGIBLE ASSETS
  • CAPITAL LEASES
  • TOTAL ASSETS
  • ACCOUNTS PAYABLE
  • CURRENT OBLIGATIONS UNDER CAPITAL LEASES
  • LONG TERM OBLIGATIONS UNDER CAPITAL LEASES
  • LONG TERM LIABILITIES
  • TOTAL DEBT
  • RETAINED EARNINGS
  • PREFERRED DIVIDENDS
  • DIVIDENDS PER SHARE
  • MARKET PRICE PER SHARE
  • # OF SHARES OUTSTANDING
  • TOTAL EQUITY

CRITICAL DATA FOUND on THE INCOME STATEMENT

  • TOTAL SALES
  • COST OF GOODS SOLD (COGS)…DIRECT COSTS
  • GROSS PROFIT
  • OVERHEAD (MARKETING, SALES, GENERAL & ADMINISTRATIVE)…INDIRECT COSTS
  • INTEREST PAID
  • TAXES PAID
  • OPERATING PROFIT
  • EARNINGS BEFORE INTEREST & TAXES (EBIT)
  • EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION & AMORTIZATION (EBITDA)
  • NET PROFIT

CRITICAL DATA FOUND on THE CASH FLOW STATEMENT

  • OPERATING CASH FLOW (OCF)
  • INVESTING CASH FLOW (ICF)
  • FINANCING CASH FLOW (FCF)
  • FREE CASH FLOW
  • NET PROFIT less PREFERRED DIVIDENDS
  • CAPITAL EQUIPMENT PURCHASES (PPE)


Numbers tell the story. But just as in athletics, the numbers don’t always portray how well you played the game. They do, however, let you know whether you are winning or losing.  

It’s not enough to ‘just have a feel’ for how your business is doing. When you ‘fly by the seat of your pants’ two major obstacles have a tendency to appear, standing between you and where you want to go—

Procrastination and Incorrect Information.

  • You hesitate because you are not sure of the Next Step to take. The uncertainty grows and matures into Procrastination, paralyzing your business. Procrastination steals decisiveness.
  • Or, by acting on Incorrect Information, you make mistake after mistake, robbing you of Time, Energy and Capital. Not everything published is profitable or productive.

Because Finance and Accounting is an Art, rather than a Science, you can’t always trust the numbers. The Art is composed of Estimates and Assumptions, Judgments and Interpretations. But, you can’t ‘Throw the baby out with the bath water’. You do have to learn which numbers are hard, those you can count on, and which are soft, those subject to estimates, assumptions, judgment and interpretation.

Your safety in working with ‘the Numbers’ is in getting their Whole Counsel. If you simply take a few isolated numbers you run the risk of developing an incorrect picture, yielding Incorrect Information, costing you Time, Energy and Capital—a price you can’t afford to pay in today’s economic climate. If, however, you make the effort and gather the necessary information, ‘the Numbers’ will release their magic and reveal the truth of How Your Business Is Really Doing.

The Whole Counsel of the Numbers will render valuable assistance in avoiding business failure. They provide essential feedback in the three (3) vital areas of your Business Guidance System:

  • NAVIGATION—They help reveal where you are at any point in time. They pinpoint your 
          location.
  • GUIDANCE—They leverage your navigation data and target information providing direction.
  • CONTROL—They allow you to correct course when necessary.

The following worksheets will serve two purposes: 1) They will help you understand which numbers are important to master, and 2) They will give you a place to capture the information you need for Navigation.

A SUMMARY LISTING OF THE WORKSHEETS’ KEY CONCEPTS
And the Value of their Magic

  • The Simple Du Pont Formula—Will tell you if the investment in company assets is paying off. (Managers rely on this formula.)
  • The Extended Du Pont Equation—Will tell you if the equity in your business is worth your risk of investment. (Owners and Stockholders rely on this equation.)
  • The Altman ‘Z’ Score—Will tell you if you are headed toward bankruptcy, and how close you may be to it.
  • The ‘4’ Tests of Operating Cash Flow (OCF)—Will tell you how healthy your business is, and identify ‘Red Flag Warning Signals’. 
  • Free Cash Flow—Will tell you how much Cash you really have to spend.
  • Working Capital—Will tell you if you have enough Liquidity to meet your current obligations.
  • Liquidity Ratios—Will tell you, and Bankers and Financial Institutions, your credit worthiness and qualifications for credit.
  • Debt Ratios—Will tell you if you are leveraged correctly or too heavily burdened with debt.
  • Key Financial Indicators—Will tell you which numbers to monitor closely on a ‘Day to Day’ basis. (Important to include on your Financial Dashboard, if you have one.)
  • Data Gathering Form—Will tell you which numbers to track ‘Over the Long Run’. (And on which Financial Statement they are located.)
  • ‘34’ Essential Financial Ratios—Will tell you which Ratios are essential for survival. (And in which category of Ratios they belong.)
​34 Essential Financial Ratios
 FINANCIAL
SCORING
WORKING CAPITAL

WORKING CAPITAL is a concept used by bankers and financial institutions to determine credit worthiness.

They want to know if a company has enough liquidity to pay its current bills.

WORKING CAPITAL is easy to calculate.  

Simply subtract TOTAL CURRENT LIABILITIES from TOTAL CURRENT ASSETS, both found on THE BALANCE SHEET. The resulting sum is called WORKING CAPITAL.

WORKING CAPITAL will tell you if you have enough Liquidity to meet your current obligations. WORKING CAPITAL should be tracked over extended periods of time to monitor fluctuations in available capital and understand trends affecting the business.
How do you know when you win?
​FREE CASH FLOW

The ‘HOT METRIC’ on Wall Street today is FREE CASH FLOW.  

Perhaps the main reason for this is Warren Buffet’s company, Berkshire Hathaway. They have used this concept for years and it is possibly one reason for their success.

Mr. Buffet refers to it as “OWNER EARNINGS”.

FREE CASH FLOW is simple to calculate.

Take the NET CASH FROM OPERATING ACTIVITIES and subtract the amount invested in Capital Equipment (Capital Expenditures), found in the INVESTING ACTIVITY section of THE CASH FLOW STATEMENT.

FREE CASH FLOW is nothing more or less than the cash generated by operating the business, less monies invested to keep it vital.

A QUESTION TO CONSIDER...
​THE SIMPLE DU PONT FORMULA

RETURN ON SALES (X) ASSET TURNOVER = RETURN ON ASSETS


PRINCIPAL FINANCIAL RATIOS 

  • RETURN ON SALES = NET PROFIT / TOTAL SALES
  • ASSET TURNOVER = TOTAL SALES / TOTAL ASSETS
  • RETURN ON ASSETS = NET PROFIT / TOTAL ASSETS

TERMINOLOGY and USUAGE KEY

  • RETURN ON SALES = PROFIT MARGIN
  • PROFITABILITY = MEASURED by PROFIT MARGIN
  • OPERATING EFFICIENCY = MEASURED by ASSET TURNOVER
  • RETURN ON ASSSETS = BOTTOM LINE #1
  • ASSET EFFECTIVENESS = MEASURED by RETURN ON ASSETS
  • EARNINGS BEFORE INTEREST & TAXES = EBIT
  • PRETAX PROFIT = EARNINGS BEFORE TAX (EBT)
  • TAX BURDEN = NET PROFIT / PRETAX PROFIT
  • INTEREST BURDEN = PRETAX PROFIT / EBIT
  • OPERATING PROFIT MARGIN = EBIT / TOTAL SALES

DIGGING DEEPER

RETURN ON SALES or PROFIT MARGIN can be broken down into other Financial Ratios to identify, analyze and evaluate company efficiency and effectiveness, with regards to taxes, interest payments and operations.

PROFIT MARGIN can be expressed as:
TAX BURDEN X INTEREST BURDEN X OPERATING PROFIT MARGIN

Managers use the SIMPLE DU PONT FORMULA to track profitability, operating efficiency and asset effectiveness.
The Simple Du Pont Formula 
The Extended Du Pont Formula
​THE EXTENDED DU PONT EQUATION

RETURN ON ASSETS (X) FINANCIAL LEVERAGE = RETURN ON EQUITY


TERMINOLOGY KEY

  • RETURN ON ASSETS = PROFIT MARGIN X ASSET TURNOVER
  • FINANCIAL LEVERAGE = TOTAL ASSETS / TOTAL EQUITY
  • RETURN ON EQUITY = NET PROFIT / TOTAL EQUITY
  • FINANCIAL LEVERAGE = MEASURED by EQUITY MULTIPLIER
  • COMPOUND LEVERAGE FACTOR = INTEREST BURDEN X LEVERAGE
  • PROFITABILITY EQUATION = TAX BURDEN X INTEREST BURDEN X OPERATING PROFIT MARGIN (See Simple Du Pont Formula)

RETURN ON EQUITY can be expressed as:
PROFITABILITY EQUATION X ASSET TURNOVER X EQUITY MULTIPLIER

Owners and Stockholders rely on THE EXTENDED DU PONT EQUATION to tell them if the equity in the business is worth the risk of investment and if their investment is profitable.
The Altman "Z" Score
THE ALTMAN "Z" SCORE

IMPORTANT CONSIDERATION FACTORS

  • LIQUIDITY
  • LONG TERM PROFITABILITY
  • CURRENT PROFITABILITY
  • SOLVENCY
  • ASSETS

RATIO FORMULAS

  • LIQUIDITY = WORKING CAPITAL / TOTAL ASSETS
  • LONG TERM PROFITABILITY = RETAINED EARNINGS X TOTAL ASSETS
  • CURRENT PROFITABILITY = NET PROFIT or EBIT / TOTAL ASSETS
  • SOLVENCY = TOTAL EQUITY / TOTAL DEBT
  • ASSETS = TOTAL SALES / TOTAL ASSETS

MULTIPLY RATIO FORMULAS by THESE FACTORS

  • LIQUIDITY RATIO by 1.2
  • LONG TERM PROFITABILITY RATIO by 1.4
  • CURRENT PROFITABILITY RATIO by 3.3
  • SOLVENCY RATIO by 0.6
  • ASSET RATIO by 1.0

‘Z’ SCORE

Add together the product of the Ratio Formulas and their respective Factors to obtain a ‘Z’ SCORE total number.

“Z” SCORE KEY

  • SCORE > 2.99 = PROMPT PAYERS = REMAIN SOLVENT
  • SCORE < 1.81 = “DEADBEATS” = DANGER of BANKRUPTCY
  • SCORES BETWEEN THE ABOVE = GRAY AREA = USE CAUTION

THE ALTMAN ‘Z’ SCORE will tell you if you are headed toward bankruptcy, and how close you may be to it.
​4 Tests of Operating Cash Flow
"4 TESTS" of  OPERATING CASH FLOW

OPERATING CASH FLOW (OCF) can be used as an indicator of the general overall health of a company. It can also help tell you if a company merits your purchase of stock in it.

Four tests can be applied to OPERATING CASH FLOW (OCF) to determine its efficacy. The ‘4 Tests’ are:

  • OCF should be positive
  • OCF should be greater than NET PROFIT
  • OCF should be greater than FIXED ASSET INVESTMENT
  • OCF should be trending in the same direction as NET PROFIT

OPERATING CASH FLOW (OCF) is one of the most important things for a business to monitor closely, because it will help you manage CASH FLOW as well as PROFIT.

​Liquidity Ratios
LIQUIDITY RATIOS

LIQUIDITY RATIOS will help tell you, and Bankers and Financial Institutions, your credit worthiness and qualifications for credit. LIQUIDITY RATIOS work hand in hand with WORKING CAPITAL.

LIQUIDITY RATIO TITLES

  • CURRENT RATIO
  • QUICK RATIO (ACID RATIO)
  • CASH TURNOVER RATIO
  • INVENTORY to WORKING CAPITAL RATIO
  • OPERATING CASH FLOW (OCF) to WORKING CAPITAL RATIO
  • OPERATING CASH FLOW (OCF) to CURRENT LIABILITIES RATIO
  • FREE CASH FLOW RATIO

LIQUIDITY RATIO FORMULAS

  • CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
  • QUICK RATIO = CURRENT ASSETS less INVENTORY / CURRENT LIABILITIES
  • CASH TURNOVER RATIO = TOTAL SALES / WORKING CAPITAL
  • INVENTORY to WORKING CAPITAL RATIO = INVENTORY / WORKING CAPITAL
  • OPERATING CASH FLOW (OCF) to WORKING CAPITAL = OPERATING CASH FLOW (OCF) / WORKING CAPITAL
  • OPERATING CASH FLOW (OCF) to CURRENT LIABILITIES RATIO = OPERATING CASH FLOW (OCF) / CURRENT LIABILITIES
  •  FREE CASH FLOW RATIO = CAPITAL EQUIPMENT (PPE) / OPERATING CASH FLOW (OCF)
​Debt Ratios
DEBT RATIOS

DEBT RATIOS will help tell you if you are leveraged correctly or too heavily burdened with debt.

DEBT RATIO TITLES

  • DEBT RATIO
  • DEBT TO EQUITY RATIO
  • TIMES INTEREST EARNED RATIO
  • CURRENT LIABILITIES to EQUITY RATIO
  • DEBT to WORKING CAPITAL RATIO
  • DEBT TO TANGIBLE ASSETS RATIO
  • LONG TERM LIABILITIES to EQUITY RATIO

DEBT RATIO FORMULAS

  • DEBT RATIO = TOTAL DEBTS / TOTAL ASSETS
  • DEBT to EQUITY RATIO = TOTAL DEBTS / TOTAL EQUITY
  • TIMES INTEREST EARNED RATIO = INCOME BEFORE TAXES plus INTEREST / INTEREST
  • CURRENT LIABILITIES to EQUITY RATIO = CURRENT LIABILITIES / TOTAL EQUITY
  • DEBT to WORKING CAPITAL RATIO = LONG TERM DEBT / WORKING CAPITAL
  • DEBT to TANGIBLE ASSETS RATIO = LONG TERM DEBT / TANGIBLE ASSETS
  • LONG TERM LIABILITIES to EQUITY RATIO = LONG TERM LIABILITIES / TOTAL DEBT
​Key Financial Indicators (KFI's)
​Data Gathering Form
​Working Capital
​Free Cash Flow
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KEY FINANCIAL INDICATORS (KFI's)
34 ESSENTIAL FINANCIAL RATIOS