10 WAYS TO BOOST YOUR COMPANY’S VALUE: Practice #7: Key Financial Ratios


Practice #7: Institute a means to track financial performance ratios

As banking relationships for middle market companies migrate from “rosy” to results, it’s important to know where you stand financially in the eyes of your bank in order to avoid a catastrophe. Here’s what I mean. Since the economic crises began, banks have been quietly tightening and restricting credit terms on nearly all their products, including lines of credit and Sr loan facilities. Unfortunately, many businesses did not become aware of the situation until it was too late. Many suddenly found themselves in violation of loan covenant terms or worse, cancelled exactly when they needed the money most.

To best know where you stand, the first thing is to call your banker and reconfirm the terms of your borrowings. Find out what has changed, and what metrics are being tracked more closely if you don’t already know. There are dozens of performance ratios that middle market businesses track monthly, and you can find most of them and their respective formulas here. http://highperformanceorganizations.net/FinancialRatios.pdf

However, from a bank lender point of view there are only a few key metrics generally in the form of written loan covenants they need to see regularly including: 

  1. Profitability – EBITDA (cash flow)
  2. Leverage – Debt to Equity ratio
  3. Liquidity – Current Ratio and Quick Ratio
  4. Working Capital –  Current Assets minus Current Liabilities
  5. Debt Service Coverage Ratio – Cash to cover interest payments

Of course, there are dozens of other performance and solvency metrics to calculate depending on your industry, banking and borrowing terms. In the past year, many businesses took too long to figure out what they needed to do in advance in order to meet the performance metrics for their bank. If you know sales are down don’t wait to contact your bank. Find out what can trigger a default and how to mitigate any adverse reaction beforehand if possible.

You should also compare your ratios to your competitors. You can find ratios for over 10,000 lines of business at www.BizMiner.com and you can use the calculators at www.Bankrate.com to get things started. Over the longer term as you grow consider as a best practice investing in a software solution that can automate and forecast business ratios quickly and easily, giving you time to react before a problem arises. And by showcasing that you are ahead of the game when it comes to transparently managing your business performance, you can increase the value of your business as compared to others that don’t.

Coming up in part 8, we will talk about reducing COGS expenses.