Put Your Working Capital to Work in Understanding Your Financial Dashboard

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by Michael Iverson

I often remind clients to pay attention to their working capital levels, particularly in today’s economic environment, when banks have shown a reluctance to lend to small businesses. Business owners need to maintain liquidity, generate positive cash flow and – to the extent possible – prepare to fund growth internally. Working capital is critical to your financial dashboard, a tool we recommend you as a business owner use to monitor your financial health.

Understand Working Capital

Let’s begin by defining working capital. Simply stated, it is the difference between current assets and current liabilities. A common perception is that a profitable business always has adequate working capital; however, that is not necessarily true. Profitable businesses can, and do, experience capital crunches. Often, an effort to expand operations aggressively is the cause of a shortage of working capital.

Working capital is composed of primarily of Accounts Receivable, Inventory, and Accounts Payable. A business owner needs to consider changes to these short-term assets and liabilities in order to ensure the business generates adequate operating cash flow.

For example, an increase in Accounts Receivable might mean a business is falling behind its in collections. Sales offered on credit, a business is effectively making a non-interest bearing short-term loan to its customer. Collecting accounts promptly is important. An aged invoice that goes past its due date can have a negative effect on cash flow. The business used precious resources to bring a product to market and sell it, but until the account is collected those funds are unavailable.

For my clients that extend credit, I recommend a dashboard metric called Days Sales Outstanding (“DSO”). It measures the relationship between Accounts Receivable and Sales. When this metric spikes higher than a specified level, then collections are not keeping pace. A quick glance at the dashboard shows you the trend of the metric. Measuring and understanding the drivers of the metric can help you identify where to make changes.

For businesses with inventory, it’s important to make sure that inventory is not consuming capital unnecessarily. Is inventory getting sold on the schedule? As with aging Accounts Receivable, a buildup of inventory ties up your cash resources when it is not converted to cash on a timely basis. The Inventory Turnover Ratio is a dashboard metric that highlights this trend. When the ratio decreases, it can signal an upcoming cash flow problem.

Another balance sheet account in working capital is Accounts Payable. Accounts Payable is the opposite of Accounts Receivable, where your business has been extended a short-term interest free loan from your vendor. When a business slows down its vendor payments, it is conserving cash. A business will at times use this strategy when it is experiencing slower payments in Accounts Receivable. Days Payable Outstanding (“DPO”) is a metric that measures your payment cycle trend. Consider putting it on your dashboard. Measuring your DPO helps identify when you may be disbursing funds faster or slower than expected.

Working Capital Ratios

To recap, here are the Working Capital ratios that I recommend you measure:

  • Days Sales Outstanding
  • Inventory Turnover Rate
  • Days Payable Outstanding

If you don’t understand the relationship of these metrics on your operating cash flow, your business can quickly become a very profitable operation that is very quickly running out of cash.

Developing a financial dashboard helps you manage review key metrics to gain insights on making decisions for your business. Schedule a free consultation with our Numbers Coach, where we are glad to discuss metrics that make the most sense for your business.

Understanding Fixed and Variable Costs and Your Break-Even Point

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by Michael Iverson

Running a business is difficult enough when you have a good grasp of your cost structure. If you don’t understand the relationship between your fixed and variable costs, achieving financial success in your business will be challenging. Let’s take a closer look at these costs and what they mean for your business.


A fixed cost, simply stated, is a cost that is incurred whether you generate $1 of revenue or not. For example, building rent is typically a fixed cost. A landlord charges a flat fee per month for use of a property. The rent amount will be the same whether a company sells $1 million worth of goods and services or nothing at all. Other examples of fixed costs include insurance, equipment leases, and non-hourly administrative salaries.


A variable cost is incurred as a function of generating revenue. If you do not sell no product or service, you don’t incur this costs. You begin to incur variable costs as you generate revenue. Variable costs include direct hourly labor related to the provision of a service or the manufacture of a product. It can also include sales commissions paid, the cost of raw materials, distribution costs, and utilities expenses related to manufacturing activity.


Metrics You Should Know


Average fixed costs—Identify and quantify the fixed costs associated with running your business, and calculate the average fixed costs for a month. Monthly averages typically work well because some businesses have a degree of seasonality to them. In the example below, Acme Company had average monthly fixed costs of $241,891 for the year 2013.

Average variable cost as a percentage of sales—Simply divide average variable costs for the period by sales for the period to calculate this percentage. If Acme Company had average monthly variable costs of $341,985 and average monthly sales of $856,803, its average variable cost as a percentage of sales is 39.9%.

Break-even point—The sales level at which Revenue equals Total Costs is known as the break-even point. As the term “break-even” implies, Profit is zero after you subtract all of your variable and fixed costs. It can be expressed as the equation:
Revenue – (Total Variable Costs + Total Fixed Costs) = Profit


It’s important to know your breakeven point so you understand at a minimum how much in sales volume you need to generate just to begin to make a profit. Let’s apply the principle to our Acme Company example: 

Avg. monthly sales $856,803 x 12 mo.= $10,281,636 Annual Revenue

Total Variable Costs = $2,902,696

Total Fixed Costs = $4,103,820.
$10,281,636 – (4,103,820 + 2,902,696) = $3,275,120


In this example, Acme Company earned a healthy profit of $3,275,120 for the year 2013. To determine the break-even point, we want to find the sales level where profit equals zero. By definition, fixed costs are static no matter the level of sales. We know the variable costs as a percentage of sales are 39.9%, or .399 for purposes of our equation. We solve for the unknown figure, Sales: 

Variable expenses / (1-.399)= sales required for breakeven $2,902,696 / (1-.399) = $4,829,777


The break-even point is $4,829,777 of sales revenue. Acme Company must generate this level of sales before it can start generating profits for the year.


Managers find it helpful to know the break-even point for purposes of business planning. The break-even point is a basic, but important, business metric. Once a manager becomes familiar with this relationship, he or she gains an understanding of how much the business can expand before adding more capacity—which means adding higher level of Fixed Costs.

If you would like help in finding your business’s break-even point, contact us.  We’re here to help!

What Does Break-Even Look Like?

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by Michael Iverson

In a recent article, I discussed the importance of knowing the fixed and variable costs of your business, as well as the break-even point. I’d like to revisit the topic using an illustration that I think you will find helpful. As the saying goes, “a picture’s worth a thousand words.”

Let’s review the particulars of the business mentioned in the previous article. For the year 2012, Acme Company had fixed costs of $2.9 million. The sales price of a unit of product was $112 and the variable costs were $44.70 per unit.

This Sales Table presents sales in 6,000-unit increments. The top line of the table shows no sales and fixed costs of $2.9 million, resulting in a loss of $2.9 million. Toward the middle of the table is 42,000 units sold, with a small loss of $96,000. The break-even point is $4.8 million of sales revenue, or 43,430 units at $112 sales price.

Actual sales for the year were 91,800 units with revenue of $10.2 million. As the table reveals, 90,000 units sold produces a profit of $3.1 million. However, Acme Company did even better.

Now, let’s look at the accompanying Break Even Analysis chart.

Dollar amounts on the vertical axis correspond to unit sales levels on the horizontal axis. The green line represents Fixed Costs of $2.9 million, which do not change with increases in unit sales. The red line represents Sales Revenues, which increase as unit sales increase—to the right along the horizontal axis. The blue line represents Total Costs.

The intersection of the red and blue lines is the break-even point. The area between the red and blue lines to the left of break-even represents losses; the area between the red and blue lines to the right of break-even represents profits. Acme Company generated sales in 2012 that put it well into the profit zone.

Between the table and the chart, you get a good sense of the dynamics between fixed costs, variable costs, and break-even. Understanding your monthly and annual break-even point is an important planning tool. It provides your team with a reference point of knowing when you are operating at a profit or a loss.

If you would like help in understanding your business’s break-even point, contact us.  We’re here to help!