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Do you wish that you had a quick and easy way to measure the health of your business?
Hi. This is Judi Otton with GrowthCast and I’m going to give you that right now. It’s called Spread and it’s calculated as cash plus your receivables minus your payables. It’s a quick measurement of how much cash you’re going to have available.
Now, obviously, if it’s negative, you’re in trouble and you want to try and improve that by raising your profit margins, increasing your sales, all the things we talk about improving the health of your business. But the idea is not to get it as high as possible.
You want to find a safe range for your business and that means you can cover all your expenses and you still have something left over in case you have a slowdown or in case there are some surprises that come up. A good metric is about 3-6 months of your fixed expenses. And then if there’s overage, you can feel very safe to either take out or reinvest the rest.
Many companies I know use this to determine how much the owner takes out. If it’s negative and you’re not profitable, the owner probably isn’t taking much out of the business. But if you’re over your safe range, it’s safe for you to take out more than you normally would.
Here are some keys – measure it regularly. Maybe even chart it because I think it’s very helpful to get a visual depiction of this. Measure it at the same time each month and make sure that you understand the changes that are occurring month over month and that you can explain them. This becomes more valuable the longer you do it. It’s valuable right away, but when you can see where you were at this time last year, it’s even more valuable.
A couple of variations that you might want to consider on this. If you are a high-inventory business, you might want to add your inventory to it. Also, if you’re using a line of credit, you’re going to want to subtract your line of credit balance from it. So this is a quick description of a really easy metric that I think all business owners should be using.
If you have questions about this or anything else, feel free to reach out. This is Judi Otton with GrowthCast and I’ll be back next week with a new Fiscal Fitness Tip of the Week.