Time for a business health checkup?
A financial health checkup can tell you what’s going on in your business. The acronym I use for that is CAMEL, capital adequacy, asset quality, management, earnings and liquidity.
If you pull out too much in excess distributions, you run the risk of not have sufficient net worth, which could put excess leverage on the balance sheet. In addition, you may not have sufficient cash to handle growth or fund payroll (liquidity). Asset quality speaks to stale AR or inventory on the balance sheet. If you borrowed or loaned the company money and don’t have specific terms of repayment on both sides of the balance sheet, you run the risk of over/understating your financial position.
Earnings tell you and your banker how profitable you are this year. Your banker will likely compare your earnings with the same period last year in your interim financials. (July 2012 ytd vs. July 2011). Your ability to manage the sales and financial sides of the house is the M of CAMEL. To be successful, you have to have both.
A business health checkup looks at your balance sheet and your income statement. Spend an equal amount of time on both. Remember three of the five letters deal with your balance sheet. (CAL)