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Accounting Standards and regulations

Statement of Cash Flows – This financial statement blends information from both the income statement and the balance sheet to give a picture of how cash is going into and out of a business. For a business owner, the “cash flow from operations” line is one of the most important across all financial statements. It shows over the period listed the net difference of cash that came in and cash that went out on an operating level. “In my experience working with companies in banking and consulting, I find that most business owners typically struggle to get a strong handle on their cash flow,” Hamilton says. “You don’t want to be worrying about paying the next bill. You want to be focused on growing the business.” Looking regularly at cash flow from operations gives better perspective on the health of the business, allowing owners to concentrate on how to improve results.

Net Profit Margin over Time – Tracking net profit margin over several quarters and years can help owners manage pricing, expenses and sales efforts. It shows how many cents in profit are generated by every dollar of sales, and it can vary from season to season and from industry to industry. As a result, it’s most useful to compare a business’s margin to that of industry peers or to itself over several periods. For example, new car dealers have much thinner net profit margins (1.8 percent in 2016 and 1.6 percent in 2017, based on a preliminary estimate from Sageworks) than those of management consultants (12.3 percent in 2016 and 12.4 percent in 2017, based on a preliminary estimate).

AR Days vs. AP Days – Accounts Receivable Days (AR Days) is the number of days until a company gets paid for its goods or services. (The ratio can be calculated by dividing the period-ending balance of accounts receivable by revenue for that period, then multiplying the result by the number of days in the period). Looking at that ratio over several periods can indicate whether receivables are piling up faster than sales or faster than the company’s ability to collect. You can also compare that ratio to Accounts Payable Days (calculated by dividing the period-ending balance of accounts payable by the period’s cost of goods sold, multiplied by the number of days in the period). AP Days indicates how long it’s taking the business to pay suppliers, so like AR Days, it has a major influence on the company’s cash situation. Like other financial ratios, both AR Days and AP Days can vary widely by industry. For example, management consultants’ average AR Days for 2016 was 43.6, while it was 10.4 for new car dealers. As a result, looking at the ratios over time and comparing them to peers is most useful.