This series started with the question: Do you want to have more financial control of your company? Each tip up to now has identified a powerful way to do that, and I’m guessing you’ve not looked at your financial situation through the microscope I’m proposing up ‘til now. So let’s keep going.
Once again, the big idea: you can quickly assess your company’s financial health by taking a good look at your Balance Sheet – the obvious and the not-so-obvious. The health of your company today is not determined by last year’s profit or last year’s sales. It’s determined by how well you are positioned to make the assets you own today produce a profit for you. So here’s Tip #4:
Your equipment: fixed assets, machinery, vehicles, computers, etc. A quick look at the cost of all that equipment compared to the accumulated depreciation, also on your balance sheet, will show you its “Net Book Value (“NBV”).” In other words, how much is left to depreciate before those assets have been written off the books and in theory used up. If the NBV is low in relation to the original cost of the equipment, you can be pretty sure that either your maintenance costs will go up or you’ll have to spend money to put new equipment in place – or both. Don’t disregard this idea just because you use aggressive write-off methods to save taxes. The concept is still valid regardless of your tax reporting practices. So here are two questions for you: #1 – Does it make sense to buy new equipment that will increase your productivity by 10% or more if you can borrow the money for 4 or 5% or less? It does if you have the cash to service the debt. #2 – What is the Return on Investment (“ROI”) of the cash you’ll tie up in the process? If figuring the ROI of all that gives you a headache, ask us to help. We do this all day long.