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  • Writer's pictureEd Patton

Financial Health / Working Capital Drivers...simple to understand and evaluate

Updated: 2 hours ago


Counterintuitive

 

This blog, and many financial experts, use the amount of net working capital as a key measure of a business' financial health.


Understanding changes in working capital / financial health is simple, but counterintuitive because it involves everything on the balance sheet, except

  • Working Capital Items

 

The Trender® Platform has known this and effectively used this important financial concept for years.

 

An optional feature, available on the Moody’s® Analytics widely-respected “CreditLens” bank reporting program, includes this concept as part of its business financial analysis.

 

The schedule at the end of this blog shows the working capital changes via the CreditLens’ “Reconciliation of Working Capital” section (circled in green).


This Moody’s Analytics’ schedule of working capital changes is the changes of...EVERYTHING ON BALANCE SHEETS... EXCEPT…WORKING CAPITAL ITEMS!


Moody’s Analytics reconciles working capital / financial health for each period by breaking out the changes in the amounts of:

(1) Non-Current Assets;

(2) Non-Current Liabilities; and

(3) Net Worth


For every period on this schedule, the net changes of these non-current balance sheet items equals the changes in the amounts of the business' working capital / financial health. 

 

As indicated above, the importance of knowing the trends and drivers of the changes in working capital is that they are a leading indicator of a business’ financial strength (or weakness).  Therefore, it is paramount that business leaders understand the drivers and trends of this significant financial health indicator.

 

The Trenders have been effectively using this concept for years…it has named this crucial item of the primary driver of changes of a business' financial health...“Foundation Cash Flow™”.

 



 







Trenders

 

Trenders convey complete financial fundamentals to decision makers of privately owned businesses in a clear and simple (elegant) manner.

 

A mantra the Trenders use to describe the succinct and understandable way in which financial fundamentals are conveyed to decision makers is:

  • Only a few numbers in a few minutes”.

 

Trenders summarize a business’ full financial profile with the 5 Elements® of Financial Fundamentals.

 

The first amount appearing on each Trender Report is the change in financial health (ie, working capital) which, as discussed above, is labeled Foundation Cash Flow.

 

The Trenders’ prominent placement of this key financial concept shows its value to decisions makers in comprehending their business’ full financial profile.

It is vitally important as it is a leading indicator of the business’ financial health.

 

Surprisingly, many accounting and financial professionals do not recognize this simple, key financial concept.

 

To learn more, reach out to Ed Patton at the contact information below:

 

Edward B. Patton

5701 Broadway, Suite 102

San Antonio, Texas 78209


Phone (210) 822-9977

 




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