Know Where You Stand With Key Business Ratios

One look at these formulas and you may feel like your back in high school algebra class! Well, your teachers said you’d use this stuff in real life, now you have the best reason of all -to gain a clearer understanding of your business.

There are dozens of ratios that accountants use to analyzing the financial health of your company in the areas of liquidity, efficiency, profitability and solvency. Here we will look at some of the most common ratios from each category.
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Current Ratio = Current Assets/ Current Liabilities

Used to measures your companies liquidity, or ability to quickly generate cash. This ratio is one of the most commonly calculated and is important because it helps you to assess the business’ ability to meet short-term debt obligations. Lenders also commonly look at this ratio.

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Days Sales Outstanding = # Days / (Sales/Accounts Receivable)

Also known as “DSO” or “Average Collection Period”, this is one of several key ratios used to measure your company’s efficiency. The Days Sales Outstanding calculates the average days it takes to collect payment on your accounts receivable. This is a great way to keep an eye on collections efforts, the key to cash flow.

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Gross Profit Margin = Gross Profit /Net Sales

Gross profit margin is one of the most universally recognized ratios used in business. Reported as a percentage, this profitability ratio measures the % of sales dollars remaining after deducting the cost of goods sold. A negative trend in the margin signals that inventory and/or cost & pricing matters require review.

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Debt Ratio = Total Liabilities / Total Assets

The solvency ratio is used to measure the company’s ability to satisfy long-term debt when it becomes due. The Debt Ratio measures the percentage of business assets financed with debt. It is generally believed that a healthy Debt Ratio should be no more than 50%. A higher ratio may indicate overuse of debt and may result in difficulty meeting debt obligations.

Tick, Tick, Tick...Those 1099's are Due by the End of the Month!

Yes, its time for one of year-ends most annoying tasks.... generating 1099's. They are due to the recipient by January 31st, but Uncle Sam give you until February to get his copy, along with the 1096, out to him.

There are an alphabet soup of various 1099 forms covering everything from the 1099A ( acquisition of abandoned property) to the 1099S (proceeds from real estate transactions.) But the most common 1099 a small business runs into is the 1099MISC. This is the form used to report to the IRS expenses paid throughout the year to independent contractors, service providers, attorneys, and other non-employee compensation.

The typical rule of thumb is that you must issue a 1099MISC to any service provider who is not incorporated, and to whom you've paid more than $600 in the last calendar year. Except for attorneys, who you must issue a 1099 to regardless of how much you spent. Click here for a link to the IRS informational guide for more details.

A couple of tips to make 1099 processing a little easier:

1. During the year, as you use independent contractors-- that's your IT guy, your cleaning company, and the woman who developed your marketing campaign,--make it a habit to have them complete a W-9 Request for Taxpayer ID and Certification and keep it on file. This will insure you have full name, address and TIN# come 1099 time.


2. Better yet, take that info from the W-9 and put it right into your accounting software. Most programs have a section in the vendor set-up screen asking if they are eligible for a 1099 and requesting their taxpayer id number.


3. Taking this one step further, if you go into the options of your accounting software (in QuickBooks you want to go into Edit, then Preferences, and select 1099) you can select the accounts and threshold which are eligible. Now you can easily generate 1099 reporting directly from your software!

Happy Filing!!

Debits & Credits

$$ The tax accountant just finished reading the tale of Cinderella to his daughter. The little girl loved the story and asked, "Daddy, when the pumpkin becomes a golden coach, would that be income or a capital gain?

$$ A businessman on his deathbed called his friend and said, "Bill, I want you to promise me that when I die you will have my remains cremated." "And what," his friend asked, "do you want me to do with your ashes?" The businessman said, "Just put them in an envelope and mail them to the Internal Revenue Service and write on the envelope, "Now you have everything."

$$ Q. Where do homeless accountants live?
A. In a Tax Shelter.

$$ Two neighbors greeted each other over the fence, “How is your daughter doing in accounting class?” inquired one, ”Great” is the response, “Now instead of asking us for her allowance. She bills us for it!”

Colonial Business Solutions goes back to School!

I'm excited to announce my upcoming involvement with the Assabet After Dark program in Marlboro, where I will be teaching "Introduction to Computerized Accounting with QuickBooks 2006." beginning March 7, 2007.

For years Assabet has been the premier provider of adult education opportunities in the greater MetroWest area, offering a wonderful selection of continuing education courses. From classes that make your home a yummier place like the "Italian Cookie Workshop" to classes designed to improve everyday life such as "How to Pay for College without Sacrificing your Retirement" , and of course *my favorite* classes that help you succeed in business, "Introduction to Accounting with QuickBooks 2006", Assabet really does have something for everyone!

I encourage any small business owner who currently uses QuickBooks and wants a better understanding of its capabilities, as well as anyone considering implementing QuickBooks to take this course. It is designed to provide a strong, broad based understanding of this powerful accounting program.

Classes fill up fast! So call Assabet today at 1-800-537-6663 ext. 429 or sign up on the web at www.assabetafterdark.com.

I look forward to seeing you!

Happy New Year!

Colonial Business Solutions is pleased to welcome you to our new blog dedicated to addressing accounting related questions and concerns commonly faced by today’s business owners. Our mission is to provide you with timely news, sensible tips & advice and valuable information intended to help your accounting department and your business run more smoothly and efficiently.

We are constantly looking for new ways to assist our clients and welcome your input and feedback. Please feel free to drop us a line if there is a specific question you have or a topic you would like to see covered.

We hope that you enjoy and benefit from theses postings and we look forward to seeing you again next soon.