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Assessing a Firm’s Future Financial Health

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INTERNATIONAL JOURNAL OF MANAGEMENT, BUSINESS, AND ADMINISTRATION VOLUME 8, NUMBER 1, 2005

Assessing A Firm’s Future Financial Health
Alicia Kritsonis MBA Graduate Student California State University, Dominquez Hills

ABSTRACT
The purpose of this article is to explain a step-by-step process that can assess whether a firm will remain in balance over the next two to three years. Various financial ratios will be discussed as a critical aspect of this process analysis. A case study of assessing the future health of the Harley Davidson, Inc. using a ratio analysis is included in the article to explain the step-by-step process used by managers to ensure a firm’s success.

A

great analogy comes to mind when considering the effects of assessing your firm’s future health. It is helpful to think of your firm as a three-legged stool. The legs are operations, marketing, and finance/accounting. As you, the leader, try to sit atop the stool, it must be balanced so that you can shift your position and sit comfortably. However, if one of the legs of the stool is too short or too long, then the stool is difficult to manage and unstable (http://www.thefullermangroup.com). Here is an example of an unbalanced firm. A firm borrows cash in order to expand its facility and operating capacity. However, sales remain constant resulting in a cash shortage. Consequently, the increased overhead costs diminish the working capital. Purchase discounts are missed resulting in decreased margins. The firm is in a state of crisis which could have been avoided through proper planning and utilizing sound financial measures (http://www.thefullermangroup.com). A second example of an unbalanced firm includes a firm with an aggressive marketing approach that outpaces the firm’s operational capability and working capital. This results in high returns, yet unsatisfied customers will leave and will…...

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