Today, you can create new business connections in various ways. Whether through attending meetings or just grabbing a cup of coffee, business networking opportunities are endless. To help you make the most of every chance, we have put together a guide to the most important business events in May 2022. It will help you organize your schedule and prepare yourself.
Here are some of the best networking and business events not to be missed this month in Orange County.
This is a category-exclusive business networking group. They have weekly meetings to provide members and guests the opportunity to promote their services and network with other business owners, executives, and community leaders.
A chance to reach out and network with fellow veterans in the business community. There, you can build lasting professional relationships to help your business, You can also help other veterans in their careers.
Sample a new coffee roast and enjoy a casual market update with leading industry insight. You can also share ideas and learn more from other investors. Topics discussed include, equities, fixed income, real estate, interest rates, inflation, and more.
An night on the town with local business owners and professionals of all stripes. Networking here is not limited to one type of industry. You can expect to see an array of different industries throughout the event.
During these meetings, you will learn how to create a sustainable, scalable, profitable business plan. The group meets a couple of times a month to kick around business ideas, talk shop with fellow business people, collaborate, and sort ideas in an environment characterized by group support.
Free to attend.
Found anything interesting? Mark your calendar and prepare your schedule for the business events you want to attend. To help you master the art of networking, here are a few tips. Are there any interesting business events that you think we have missed? You can add them in the comments section.
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What are liquidity ratios? Well, let’s start with liquidity. Put simply, liquidity is the ability to convert an asset into cash. In terms of a business, it refers to the general amount of liquidity the business has. In other words, the amount of cash and/or assets that can be easily converted to cash that a business has available to it.
Accounts receivables and inventory are great examples of liquid assets. When a balance sheet has more liquid assets (or current assets) than current liabilities (i.e., payments that the company will need to make in the short-term), it shows the company has enough liquidity to meet its short-term obligations.
However, there’s a better way to gauge a company’s liquidity—with liquidity ratios.
What are liquidity ratios exactly?
Liquidity ratios represent a company’s relative access to liquid assets, and in turn, its ability to pay short-term obligations without external financing.
Financial analysts and investors commonly use liquidity ratios to gauge a company’s ability to pay its creditors and lenders.
Before you use liquidity ratios, there’s something you should know—more liquidity isn’t always better. When a company has too much money tied up in liquid assets, it will lose out on earning higher returns on relatively less liquid assets. Ideally, a company should hit the sweet spot between having too much and not having enough.
For instance, you’d never want to see more current liabilities than current assets on your balance sheet because that means you don’t have enough liquidity. On the other hand, if your current assets are 10x the current liabilities, you’re not investing money optimally.
Now that you know what liquidity ratios tell you and have a basic idea of how you should interpret them, let’s look at the three types of liquidity ratios.
Types of liquidity ratios
Each liquidity ratio tries to analyze the company’s liquidity, but with varying levels of conservatism. The current ratio is the least conservative, while the cash ratio is the most conservative. Let’s talk about how.
1. Current ratio
The current ratio simply compares current assets to current liabilities. It tells if you have enough liquidity to meet your short-term obligations. The formula, quite intuitively, is:
Current Ratio = Current Assets ÷ Current Liabilities
A current ratio of less than 1 can spell trouble, but there’s no optimum ratio, because the optimum current ratio differs based on the industry.
Current Asset Definition: current assets are assets that are expected to be converted to cash or used up within one year, or one business cycle.
Current Assets Definition: current assets are assets that are expected to be converted to cash or used up within one year, or one business cycle.
Current Liabilities Definition: current liabilities are liabilities that are expected to be due within one year, or one business cycle.great way to learn more Want to learn some more great accounting / finance terms? Check out our list of key accounting vocabulary here.
2. Quick ratio
The quick ratio is also called the acid-test ratio because it tests a company’s liquidity more stringently than the current ratio. Unlike the current ratio, the quick ratio doesn’t include all current assets. It only includes current assets that can be quickly converted into cash.
For instance, inventory is excluded because even though it’s a current asset, you may or may not be able to liquidate it quickly.
The formula for quick ratio is:
Quick Ratio = [Cash & Cash equivalents + Accounts Receivable + Marketable Securities] ÷ Current Liabilities
Cash Equivalents Definition: cash equivalents are assets that are not at risk of significantly changing in value that can be converted to cash immediately. Examples include commercial paper, Treasury bills, and some short term government bonds.
3. Cash ratio
The cash ratio is the most stringent of all the three liquidity ratios. It only includes cash and cash equivalents in the numerator and tells you whether you’re holding enough cash and marketable securities to meet short-term obligations.
The cash ratio can be calculated using the formula:
Cash Ratio = [Cash + Cash Equivalents] ÷ Current Liabilities
How do you calculate liquidity ratios?
Liquidity ratios are what are known as balance sheet ratios. That is, ratios whose data is pulled from the balance sheet. So how do you calculate them? It’s simple, just pull the info described above straight off of the balance sheet. (Want to learn more about balance sheets? Check out our great introduction to balance sheets here.)
Importance of liquidity ratios
Liquidity ratios allow companies and stakeholders to monitor liquidity.If a company becomes illiquid, it can be at significant risk of not being able to satisfy its upcoming obligations. (Not to mention any surprise obligations.) It may also experience higher borrowing costs as lenders may charge a higher interest rate because they perceive the company as a higher risk borrower.
The ratios can also be useful in rooting out the causes of poor liquidity. For instance, if a company’s current ratio is poor, but it has a good quick ratio, the problem probably has something to do with inventory. If you’ve started holding too much inventory, it will adversely impact your current ratio, but not the quick and cash ratios.
However, context is important too. A company may need more inventory because they expect greater demand for their product or because they’re introducing a new product line.
Limitations of liquidity ratios
Liquidity ratios help analysts, investors, and lenders understand a company’s liquidity position. They do come with a few inherent limitations, though:
Liquidity ratios are calculated based on historical figures,i.e., the book value of current assets. The value of marketable securities can often change quickly and can impact a company’s liquidity position.
It’s possible that a fundamentally strong company is going through a brief rough patch. Such circumstances aren’t reflected in a liquidity ratio and may create unnecessary concern.
Liquidity ratios are calculated the same way for all industries. This is a problem because different industries require different levels of liquidity. Some industries are cyclical, while others have significantly higher working capital requirements.
Even with their limitations, liquidity ratios provide valuable insight into a company’s liquidity position. They’re reliable tools as long as you’re mindful of their limitations and understand how to use them.
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Business Owners Need to Understand the Difference Between Cash Flows and Profits
Cash flows and profits are financial metrics that are crucial to business success. And people, especially those new to finance and accounting, can confuse the two terms. But cash flow and profit are not synonymous.
You must understand the difference between these terms to run your business successfully. You can jeopardize the financial health of your business if you constantly mix up cash flow with profit.
If you are an investor, understanding cash flows and profits can make it easy to spot a good investment. As a business owner, you can skillfully make crucial decisions and identify growth opportunities.
Let’s find out everything you need to know about cash flows and profits, how they are different, and how they can affect your business.
What is Profit?
Profit is what remains after subtracting all the expenses from revenue. If you are making a profit you are making more money than you need to run your business.
Like cash flow, profit can also be positive or negative. To help you calculate your profit, you need to figure out your total revenues, costs, and total expenses. These three numbers determine whether there is net profit or net loss. (By costs we mean costs of goods sold, or costs of sales. If you don’t know what those are, don’t worry, you can just consider them another expense.)
Subtract your costs and expenses from your revenues. If your profit turns out to be a negative number, your business has sustained a loss. This situation means you are spending more than you are gaining. If the number is positive, you are netting a profit.
There are three different forms of profit.
Gross profit is your revenue minus the cost of products sold, also known as COGS.
Operating profit is the net profit generated from your core business operations. It does not include deductions from interest and taxes.
Net profit is the amount left after subtracting all operating costs, interests, and tax expenses over a given period. It is the result of deducting your total expenses from your total revenue.
Given this equation, you can deduce that your product price and the costs it takes to produce it are two important components involved in determining your gross profit.
How you manage your expenses has a considerable impact on the outcome of your business. Evaluate your expenses if your net profit isn’t big enough, or worse, you’re not netting a profit. From there, you can improve your company’s profitability.
Proper pricing could also help increase your profit. You can switch vendors or reduce your employee salary to control your costs, but it is the price that you have total control over. The bigger the difference between your product price and the cost of production, the bigger your gross profit. Find the highest possible price that will not scare off your customers.
What is Cash Flow?
Running a successful business requires you to follow numerous rules. But if there is one rule you must stick to, it would be to never run out of cash. It is extremely important to maintain an adequate cash balance, but unfortunately, many business owners and managers ignore this issue until it is too late.
Cash flow is the net balance of cash going in and out of your business at a given point in time. It can either be positive or negative. Negative cash flows means that your business has more money going out than going in. Positive cash flows suggest that you have more money coming in than going out. Positive cash flow gives you the ability to pay loans, pay expenses, and have a buffer in case of financial challenges in the future.
It is necessary to manage cash flow for daily operating costs, purchases, salaries, and tax payments. You must control cash that moves in and out of your business and know how well your cash balance stands against cash demands. (The statement of cash flows is the financial statement that provides info on the cash that is coming in and out and what it is being used for.)
It’s never safe to assume that cash will always be available as long as you are making a profit. If you don’t monitor and control your cash flow, you may find yourself in a serious bind.
This is one of the reasons why many product-based startups face money issues. A business that sells products has to spend cash first, whether for buying the product or for getting raw materials. Even if the product has the potential to bring in enormous profits, if the startup does not have enough cash, it will not survive.
It can be confusing when you are running out of cash, yet your startup is making money. Experienced business owners will tell you that it’s possible to be making strong profits yet not have enough cash.
This scenario happens because each sale adds to your revenues, and therefore profits (see above); however, sales don’t translate into cash flows until you get paid. So, if you are making sales like crazy and creating products like crazy to satisfy the demand but not getting paid quickly enough you may run out of cash and not be able to pay things like rent and salaries. That is a big problem, to say the least.
With this in mind, “Don’t focus on sales,” is sound advice. Sales are important, but cash is king.
But it’s important to remember that cash flows don’t just come from sales. Cash flows can come from various sources. If you get a loan, that is a source of cash flows. If you sell a piece of equipment, that is a source of cash flows. If you finally get paid on a sale you made a year ago, that is a source of cash flows. If you sell equity to some new investors, wait for it, that is a source of cash flows.
So, in summary, cash flows and profits are not the same thing. Profits are what is left over after you deduct all of your expenses / costs from your revenue, but that doesn’t necessarily translate to cash. Cash flows are a separate phenomenon independent from profits, and represent the actual net amount of cash in and out of the business. To run a successful business you must mind both. (Want to learn more? Check out our handy definitions page here.)
Who are we? We’re My OC Bookkeeper. Orange County’s premier bookkeeping and business advisory firm. (We also really understand cash flows…) No matter what kind of business you run we can serve as your back office so you can focus on the front. Reach out to us today and let’s do great things together! Watch the video below to learn more.