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Welcome to eBrief, our new electronic newsletter for NY area attorneys who are clients and friends of the firm. eBrief is a bi-monthly communication designed to provide useful information and timely tips on a wide range of business-related topics. If you have comments or suggestions, please send us an email. We hope you enjoy eBrief.

Performance Anxiety:
Hot Ratios for Zeroing in on Clients' Financial Statements

Understanding and using financial ratios are a great way to better understand your clients' business, and to help your clients minimize anxiety and make targeted improvements in their financial performance. Some ratios measure return on investments (the return on equity and return on assets ratios) and safety and liquidity (net working capital, current ratio, long-term debt ratio, x times interest earned ratio, and debt service ratio). Other ratios measure the organization's operating efficiency (ratios that cover inventory and accounts receivable turnover).

Armed with the knowledge of how to calculate ratios, together with some benchmarks, you can better serve in your role as counsel and watchdog for your clients' business interests.

1. Net Working Capital. The lifeblood of a company, this is the total current assets minus the total current liabilities. In a healthy company, working capital should increase each year. Working capital finances the cash conversion cycle of a business, meaning the time required to convert raw materials into finished goods, finished goods into sales, and accounts receivable into cash. These factors vary with the type of industry and production cycles.

Ratio	Example
Current assets (Balance Sheet)	$2,155,000
- Current liabilities (Balance Sheet)	-1,924,000
	231,000

2. Debt Coverage Ratio. This ratio measures the company's ability to pay both the interest and the current principal on its outstanding debt and suggests the level of safety for creditors concerning debt service obligations. Debt levels are particularly important to monitor in times of economic recession and are usually measured on an annual basis or on a rolling 4-quarter basis. This is an important ratio for bankers, who often look for a minimum ratio of 1.

Ratio	Example
Income before interest & taxes (Income Statement)	$840,000+242,000
Interest expense plus amounts of scheduled debt	$242,000+324,000
Repayments (Income Statement and Statement of Cash Flows)	=1.9 times

3. BONUS Ratio. Did you ever wonder why Dell Computer's business model is so admired and "just in time" inventory management has become so popular? Dell's 10-K filing provides an insight with its "cash conversion cycle." The cash conversion cycle, usually expressed in days, tracks the outlay of cash for raw materials against the receipt of cash after the finished goods have been sold. The shorter the cycle, the more working capital a business is generating, which means less borrowing is needed. The Dell report shows the company has a positive cash conversion cycle of 36 days

Days of sales outstanding	31
+Days of inventory supply	+3
- Days in accounts payable	-70
Cash conversion cycle (positive days)	(36)

The Numbers Never Lie
Ratios are a well-accepted way to measure the financial performance of any business and bring your clients' true financial picture into the light. It is important, however, to note that overall performance management involves more than just financial and historical analysis--leading indicators are also a vital tool for monitoring a company's health. Future issues of eBrief will elaborate on that theme.

To download a more complete set of ratios, visit:
www.amper.com/publications/lawManagementJournal.asp

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