Business Math, Ch. 21

The acid test & flattening cash flow over the fiscal year

Although an owner of a business with an acid test ratio <1 should be concerned with cash flow, perhaps there is a lot more to the story than just that result.

For instance, in a business that is cyclical in nature, for instance, at a “down” time of the year, a financial analyst might see that the acid test ratio is <1.  Should this be a time to panic?  No, of course not.  This particular scenario would be a time to understand more about the business.  This would be a time to plan for the future.  If you can see seasonality (up times and down times) in your business or with your products, you can prepare for such times.

So, class…these ratios were created to help educate you about your business.  Sometimes they might look scary, and although they might indeed be indicative of a global problem with the business, it is good to step back and see the whole picture of the business.

Class, what are some seasonal businesses that come to mind?  What have these businesses done to flatten out their cash flow over the fiscal year?