Small businesses in New Zealand may not have the budget to hire their own accountant, despite facing many of the same financial challenges as bigger companies. Fortunately, intuitive accounting software, such as CashManager, enables enterprises to take care of their own finances with tools that are simple and easy to learn. Accomplish has designed programs with the business owner in mind so anyone can excel at accounting.
However, in addition to implementing the right tools, learning a little accounting lingo can help you leverage your reports and records more strategically.
One of these terms is acid-test ratio. While it might sounds like something you did in ninth-grade chemistry class, it's actually a technique accountants use to assess the financial security of an organisation. It shows you how well you can weather the storm should something unexpected cause a significant disruption in your operations.
To figure out your acid-test ratio, you need to add your on-hand cash to your marketable securities (or short-term investments) and accounts receivable. The second part of the ratio is your current liabilities.
You can divide the first sum by the liabilities figure to get a whole number, with anything under one indicating that you're not in a great financial position to pay your obligations should something negatively impact your cash flow. In that case, you might be forced to sell off some of your capital or long-term assets to make good on your liabilities, which can ultimately harm your revenue going forward.
What should you do if your acid-test ratio is low or getting worse over time? Often, this signifies you could be struggling to generate enough sales or falling short on your cash flow strategy. Take a look at your other metrics and evaluate whether you're paying your bills unnecessarily early, or struggling to get your customers to make payments on invoices in time.