When it comes to the risk of default, Moody’s found that during COVID-19, American businesses had a 7.8 percent chance of defaulting. This is compared to a low of 4 percent in 2021, but lower than the current 9.2 percent risk of default, according to a March 2025 report by the rating agency. Also known as cash flow available for debt service, CFADS determines how much cash is available to service debt obligations. It looks at different cash inflows/outflows to show both internal (owners and managers) and external audiences (investors) how efficient (or not) a business is in its ability to produce cash flows and manage its debts without defaulting. While one method businesses use is balancing client sales, it […]

When it comes to analyzing a company’s financials, there are many avenues we can take. One way is through multiples; calculating the EV/2P multiple is the focus of this analysis. This ratio looks at a business’ enterprise value against its proven and probable 2P reserves. While ratios or multiples are used in valuing companies, this metric is used chiefly to value gas and oil companies for energy sector analysts. Analysts use this calculation to determine the likelihood that a company’s reserve resources can underpin its functioning and expansion efforts. Along with the ratio, analysts use micro and macro factors to determine a company’s financial health, its growth prospects, and whether the business is undervalued or overvalued. This multiple is similar […]

The subscription economy, according to Forbes, is expected to reach $1.5 trillion in revenue for businesses. With the potential likely realized this year, it’s vital to understand how it is tracked – and more importantly, how it’s able to be tracked on a separate basis. Also known as net dollar retention (NDR), this metric calculates the proportion of recurring revenue kept from present clients, including upsells and churn, during a defined time frame. Net revenue retention (NRR) evaluates a business’s potential to keep and increase sales from their present clients. It looks at how well a company leverages existing customer relationships to increase sales through add-ons, complimentary services, etc. It focuses on the long-term growth of recurring revenue from these […]

Return on Ad Spend (ROAS) is one way to help advertising and marketing professionals and investors analyze how well promotions do (or don’t) produce sales. It helps advertisers develop data based on their campaigns’ revenue production (or lack thereof). Understanding how this metric is calculated and how to analyze ROAS is essential for businesses to monitor and increase their advertising performance. Known as a Key Performance Indicator (KPI), ROAS determines how much sales are generated per dollar invested on advertising outlays. It separates advertising costs from the company’s costs, and it focuses on: 1. The differences between advertising income and advertisement expenses 2. Assisting companies with creating efficient budgets 3. Identifying unprofitable campaigns How ROAS is calculated: Return on Ad […]

The CAC Payback Period looks at how a business needs to recover its investment in attracting new customers. It is especially crucial for companies that are in industries with large marketing and sales costs. It’s an important metric because it helps businesses measure their performance in a number of ways. First, it shows how well a business is managing its budget. Based on the resulting figure of the CAC Payback Period, the shorter the time required to break even on its customer acquisition costs, the more efficient a company is with its sales and marketing expenses. If, however, the result is high, this signals the company is doing something wrong and needs to analyze its current approach. Running this analysis […]

No matter the type of business or industry, being able to analyze and deduce patterns is essential to discovering a business’ financial health. Here are four commonly used calculations to help internal and external stakeholders determine an organization’s ability to manage its finances. Break-Even Analysis This formula analyzes fixed costs versus the profitability a business earns for every extra item it creates and sells. Businesses that have smaller thresholds to meet their fixed costs to realize profitability have an easier break-even point to meet and exceed. Once the fixed costs threshold is satisfied and sales revenue outpaces variable costs, a business will know when it hits the break-even point. Break Even Point (BEP) = Total Fixed Costs/(Price Per Unit – […]

This metric, which is also referred to as the cash cycle or the net operating cycle, looks at the time a business takes to recover its investment in inventory to eventually sell. The process starts from selling its goods, collecting on outstanding receivables or invoices, and satisfying its operating costs with the sale proceeds. It’s normally measured in days to determine the company’s financial health. The less time necessary to complete the CCC, the healthier a company is financially because it means the business’ money spends less time tied up in inventory or collecting on outstanding inventory. It’s important to be mindful that different industries have different CCC time frames. Generally speaking, most calculations are done on either a quarterly […]

Analyzing a company’s Accounts Receivables is an effective way to measure its current cash flows and the likelihood of maintaining healthy cash flows. According to the U.S. Chamber of Commerce’s Small Business Index (Third Quarter 2024), 68 percent of small business owners reported being content with their third quarter cash flow performance. This illustrates the importance for small business owners to do everything possible to maintain healthy cash flows, including evaluating the quality of accounts receivables (A/R). Defining Accounts Receivables This account or line item on the balance sheet gives the business’ managers/owners and investors a measure on how much money a business expects to receive from selling goods or services. It’s an important metric because it’s a measure of […]

Whether it’s a private equity transaction or an institutional or retail investor, analyzing a company’s financial statements is an important part of fundamental analysis. One important but basic way to analyze whether a company is worth investing in is through the expanded accounting equation. The most straightforward equation to analyze a business’ balance sheet is: Assets = Liabilities + Shareholder’s Equity However, there are more detailed equations that analysts can employ to more closely examine a company’s financial situation. One way to look at it is by more comprehensive equations that break down net income and the transactions related to the equity owners (dividends, etc.). This equation is a building block of accounting because it focuses on double-entry accounting – […]

When it comes to running a business, there are a lot of expenses incurred during operations. As of January 2024, New York University’s Stern School of Business had recorded nearly $1.2 trillion in capital expenditures by U.S. sectors. Considering this, there are two important concepts that are imperative to study for effective accounting treatment: capital expenditures (CapEx) and operating expenses (OpEx). Defining CapEx and OpEx Operating expenses (OpEx) are required outlays a company incurs on a more frequent basis to take care of day-to-day expenditures. Capital expenditures (CapEx), conversely, are larger purchases that businesses intend to use over the long term (at least 12 months).  Different Considerations OpEx This type of asset is more of a short-term consideration. Expenses that […]

With more than eight million small businesses in America, and more than $776 billion in net premiums issued by the insurance industry in 2022 for commercial policies (according to the Insurance Information Institute), business insurance is big business. Along with protecting businesses from a myriad of claims, insurance expenses also have to be accounted for correctly. When it comes to defining prepaid insurance, it’s essentially remittances that businesses (and individuals) make to an insurance company in advance. Normally, the usual time-frame for an insurance policy is 12 months. The time-frame is important when it comes to distinguishing between current and long-term asset classification. If a prepaid expense, such as an insurance premium payment, is not utilized within 12 months of […]

A credit policy explains how a company will manage lines of credit for client accounts and what procedures to follow for severely outstanding invoices. It helps a business promote a robust foundation for its working capital level. Defining a Credit Policy Unlike personal credit scores, business scores range from 0 to 100; the scores from the FICO Small Business Scoring Service range from 0 to 300. According to the U.S. Small Business Administration, a first step to establishing business credit is to sign up for a Dun & Bradstreet (DUNS) number for each business location. There are three components to a company’s credit policy. First, develop an effective system of following up on past-due invoices. Second, define when, how much, […]

During Q3 of 2023, businesses in the United States made approximately $3.3 trillion, according to Statista. This is right behind the third quarter of 2022, when corporations in America made even more money. These figures are the net income of the respective periods, according to the National Income and Product Accounts (NIPA). With profits reaching all-time highs since Q3 of 2012, understanding how businesses can analyze their profitability ratios through the Operating Return on Assets (OROA) ratio is another helpful tool for number crunchers. Defining OROA This calculation helps business owners and analysts determine how well a business is run. It shows the percentage, per dollar, that a business makes in operating income relative to assets involved in day-to-day operations. […]

When it comes to any business, but especially for a start-up, it’s essential to determine how long a company can survive before it must declare bankruptcy and/or close its doors. The biggest metric, especially for a start-up, is to determine how much money a company has to keep its lights on. The term “burn rate” is defined as how much money a company spends monthly to maintain its operations. It is essential for a company to know how long it can operate before it begins to generate income and hopefully becomes cash flow positive. It is important to look at two differences between the two sub-meanings of this term: the first is “gross burn” and the other is “net burn.” […]

We all have those days when we dream of striking it rich with a winning lottery ticket. Never having to work again while living a life of luxury. While your chance of finding a four-leaf clover is higher than winning the lottery, we can still dream, right? And while we are dreaming, let’s talk about the best ways to deal with landing such a large sum of cash. And since lottery winners have a limited time to claim their prize, it’s important to take prudent steps when managing the money. How Much Do Winners Actually Take Home? Let’s take a look at actual prize amounts from recent winnings. The October 2023 Powerball jackpot of $1.2 billion translated to a cash […]

Variance analysis is found by determining the difference between what was budgeted and what actually occurred. Additionally, when variances are added together, we get a better picture of how well a company is measuring its performance against expected metrics. It’s also important to be mindful that each metric is measured to determine what the actual cost is versus the industry’s standard cost. Whether it’s materials, labor, electricity, or another metric, if the actual cost is lower than the standard cost for the same quantity of materials, it would be a favorable price variance. However, if the number of materials was more than the standard quantity, it would be considered an unfavorable variance. Examining variance allows us to analyze the price […]

Fiduciary accounting, which is also referred to as court accounting, is a way to document and report financial activity during a discrete period of time for legal entities, such as a conservatorship, estate, trust or guardianship. It’s meant to give adequate notice to all relevant parties when it comes to every consequential financial activity impacting the administration that occurred over the accounting time frame. It shows every disbursement and receipt that is managed by the legal entity’s fiduciary. It accounts for transactions beginning with the initial funding or principal, and the resulting future transactions, including income. When it comes to the format of fiduciary accounting, along with the United States having its own unique modifications, the Uniform Principal and Income […]

According to the United States Department of Labor’s Consumer Credit Protection Act (CCPA), wage garnishments are a complex legal process for employers to account for when it comes to employment matters. This article specifically refers to Title III of the Consumer Credit Protection Act.  Usually authorized through a court order, a wage garnishment directs an employer to withhold or garnish an employee’s wages for a certain amount or percentage to satisfy an outstanding debt. Wage garnishments also can be implemented for delinquent tax obligations and other debts owed to federal agencies of the U.S. federal government, as well as for state-level tax collectors.  Another consideration for Title III is that for a single debt, employees may not be fired; but […]

When it comes to measuring revenue, it’s essential that businesses analyze it from a variety of perspectives. While there’s revenue and net income on an income statement to show a company’s quarterly financials, another way to measure it is through ARPU (average revenue per user) and ARPPU (average revenue per paying user). Defining ARPU ARPU is the average revenue per customer or per unit. It looks at how much revenue is earned over a particular timeframe (multiple times a month, quarter, half-year, or 12 months) divided by the average patron during the same timeframe. This can be applied to many different types of companies, including social media and software as a service (SaaS). It’s calculated as follows: ARPU = Total […]

With accounting fraud and financial reporting mistakes creating a lack of confidence, understanding how financial reporting mistakes occur and are detected is an important topic. According to the Association for Federal Enterprise Risk Management and the U.S. Securities and Exchange Commission, the first nine months of 2018 saw 8.8 percent more accounting fraud enforcement action cases versus 2017. Controls are procedures implemented to lower the chance of financial reporting issues. While these mechanisms are meant to prevent an overload of problems, they are not always foolproof. Corporations also are required to show that sufficient financial oversight is in place for financial records and assets by the Sarbanes-Oxley Act of 2002. There are two types of controls: preventive and detective. As […]