When purchasing a business, you want to first do some research about the company’s potential returns combined with its asking price. When looking at a business, you will want to ask the owner for the projected financial statements of the business in question. To understand a business’ financial health, you need to look at the key indicators: income statements, balance sheets, cash flow statements, tax returns for the past three years and footnotes. Below are 8 factors that you should focus on closely.
1) Insufficient or Excessive inventory – If the business is product based, make sure to look into its inventory. Too much inventory can become a lost cost, as it might not be used and it’s expensive to store and insure. Excessive inventory can also mean that the business is not able to deliver their product to their customers fast enough, or customers are returning their products.
2) Lowest possible level of inventory – Before purchasing a company, you will want to find the lowest possible inventory that the business can hold. After this, ask the owner to reduce the stock to that number. You only want inventory that is saleable and current.
3) Accounts receivable – Uncollected receivables can inhibit a business’s future growth and demand unforeseen bank loans. The factors that you want to pay close attention to are the business’s credit policy, accounts receivable turnover, aging of receivables, and the schedule of cash collection.
4) Working capital – Working capital is current assets minus current liabilities. A business needs working capital to stay afloat. Another key aspect of working capital is to understand at the ratio of net sales over net working capital. This will tell you how efficiently working capital is being expended to maintain business objectives.
To read the complete list of important business financial factors, click here to read the full article form Entrepreneur.com.