Of the hundreds of financial reports that exist, two are enough to get started. Current liquidity shows whether you can pay your near-term obligations, and it is calculated by dividing short-term assets by short-term liabilities. Net profit shows how much profit you're left with for every 100 lek in sales, and it's calculated by dividing net income by revenue. One measures breathing, the other measures strength.
Take from the balance sheet the current assets, namely cash, accounts receivable, and inventory. Divide them by the current liabilities, namely accounts payable, taxes payable, and the year's installments. The result shows how many times you cover your near-term obligations with what you have or what can quickly be converted into cash.
A ratio below 1 means that near-term liabilities exceed near-term resources, and that requires attention. Many businesses feel comfortable somewhere between 1.2 and 2. But this range is not dogma. A bar that takes in cash every day lives comfortably even with a little over 1, because money keeps coming in. A wholesaler who sells on a 60-day credit term needs a higher figure, because his money is tied up in invoices. And being too high isn't necessarily good either. It can hide inventory that isn't moving or cash that's sitting idle.
Net profit divided by revenues, expressed as a percentage. This indicator answers the owner's most human question: Of all this work, how much is left for me?
Even here, be careful with the comparisons. Wholesale trading operates on low margins and high volume, often with just a few percent. A professional studio can have 20% or more, because it sells time and expertise, not goods. Therefore, compare yourself to yourself month after month and to your own sector, never to some universal number found online. Jack Stack, in The Great Game of Business, shows where this path leads when it's fully baked. When the owner—and then the team—together track a few well-understood metrics, the business becomes an open-ended game that everyone plays.
Take the grocery store off the balance sheet at the end of the year.
Current liquidity. Short-term assets: cash 350,000 LEK, goods 900,000 LEK, and accounts receivable 250,000 LEK, totaling 1,500,000 LEK. Short-term liabilities: suppliers 500,000 LEK plus liabilities to the state 100,000 LEK plus the annual loan installment 400,000 LEK, totaling 1,000,000 LEK. The ratio is 1,500,000 divided by 1,000,000, so 1.5. The store covers its near-term liabilities one and a half times.
Net profitability. Annual revenue 12,000,000 LEK. Net profit 960,000 LEK. The ratio is 960,000 divided by 12,000,000, so 8.1%. Of every 100 lek in sales, the store keeps 8 lek. For a grocery store, this is a good figure. For a design studio, it would be alarming.
At the Resource Center you'll find a sheet where you enter five figures from the balance sheet and the statement, and both metrics appear automatically, showing month-by-month performance. You'll find it at Resource Center.
To go from two metrics to a full three-figure picture, the simplified DuPont analysis remains the fastest tool. Return on equity is broken down as net margin times asset turnover, earnings divided by total assets, times financial leverage, total assets divided by equity.
For the example store, with total assets of 1,700,000 LEK and capital of 800,000 LEK. The 81% margin, the turnover of 12,000,000 divided by 1,700,000 equals 7.1, and the leverage of 1,700,000 divided by 800,000 equals 2.1. The return on capital comes out to 0.08 times 7.1 times 2.1, approximately 1,191 TP3T per year.
The advisory benefit lies in the diagnosis. Two businesses with the same return can achieve it by completely opposite means: one with a high margin and low turnover, the other the opposite. The breakdown shows which of the three levers the client is actually using and which one is locked. For the small Albanian business, where equity is often thin, beware the euphoria over the figure. A very high return on small capital says more about leverage and risk than about the strength of the model.
Profitability every month, along with the monthly statement. Liquidity at least every quarter, and always before a major decision such as a loan, investment, or hiring.
Trust your gut only as far as it pushes you to dig deeper. Indicators are calculated on a date's figures, and if the entries are delayed or the asset is overvalued, the indicator is embellished. Clean figures first, then the indicator.
If you want someone to calculate and comment on these metrics for your business every month, check out our packages at offer.
We take care of accounting and taxes, so you can save time, money, and focus on growing your business.
Request a Quote
