“the scientific study of the body and how its parts are arranged” Cambridge Dictionary.
Now I know you are not reading this article to improve your understanding of the human anatomy, but if we change body to business then we have a discussion you may be interested in reading,
business anatomy, still a noun!
“the study of the business and how its parts are arranged”
In this article my aim is to describe the similarities between your body and your business. Alas, financial professionals tend to regard a business as a set of numbers that we run a quick health check over.
Debt to Equity, Earnings per Share, Net Tangible Assets, etc.
Your goal after reading this article is to see your business as an active entity that has a personality (mission statement), financial strength (balance sheet), financial appetite ( Earning before Tax & Interest, EBIT) and Circulation ( cash flow)
Business Personality – is your business high growth, technology, customer focused, staff centric etc, what does your business believe it stands for, also what do your customers think your business stands for?
Financial Strength – your balance sheet holds the assets of your business, if you have a strong balance sheet then you can negotiate from a position of strength. A strong balance with cash reserves also gives you time to reposition in times of change.
Financial Appetite – to be a healthy business you must feed your business EBIT (earnings before interest & tax), EBIT is the fuel that a business operates on or stores as cash reserves, the better the EBIT, the greater opportunity a business has to grow.
Circulation – in business terms cash flow is like blood, all businesses run on cash, if you have an inefficient system that is slow in turning sales into cash, it does not matter how much you feed the balance sheet with EBIT, your business will wither and die without cash.
To emphasise this point we will look at International Trouble Limited. ITL sells product into an international market, unfortunately, ITL does not realise that this market expects extended payment terms. Are extended payment terms important if the Gross Margin is 80% & EBIT is 50%? ITL has stunning profitability, great balance sheet with strong net assets position (due to a high debtors). Unfortunately, after 6 months they are still trying to get paid. They have run out of cash!