Hello Reader, If you want to get more responsibilities in your finance team, I have one tip for you: don’t focus only on the P&L. Instead, make sure you understand your balance sheet and how the business is impacting it. In my experience, understanding my balance sheet is one of the factor which brought me to financial leadership positions. To help you get better at Balance Sheet Analysis, I have prepared for you the 5 ratios you can use. Free template of the week: Here is a free professional CV template for this week. There are many financial ratios to analyze your balance sheet, but I've singled out the best five ratios from my personal experience. Top 5 RatiosHere are the 5 most essential ratios which will help you get the most value from your balance sheet. #1: Quick RatioGoal: Check the solvency of your company and how fast you can repay your short-term debts with your quick assets. Formula: Quick Assets / Current Liabilities (where Quick Assets = Current Assets – Inventory) #2: Inventory TurnoverGoal: Measure how many months of inventory you have on your balance sheet. Formula: Cost of Goods Sold / Average Inventory Note: Use the Cost of Goods Sold (COGS) of the last 12 months to measure how many months of inventory you have. For example, COGS of 100m$ / Inventory of 25m$ means that on average, your inventory will last a quarter (3 months). #3: Asset TurnoverGoal: Check how much CAPEX you need for each $ earned. The higher the number, the fewer assets you need to make revenues. Formula: Turnover / Net Tangible Assets #4: Cash Conversion Cycle (CCC)Goal: Check how many days you need to convert your cash out (from inventory into cash in (from sales)). Formula: Days of Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding Note:
#5: Working CapitalGoal: Measure the capital used to finance the daily operations. Formula: Current Assets – Current Liabilities Note: If you reduce it, you can free some capital to invest in CAPEX or new investments. Bonus/Last Tips
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