Answer: Yes and the name of that metric or ratio is the Adequacy of Resources ratio. Comparing the Adequacy of Resources ratio between the months, this tool will provide insight as to whether cash and other short term assets generated by operating income is keeping up with your operating expenses.

The Adequacy of Resources Ratio is classified as a liquidity ratio. It gives you information about one of the most important short term operating headaches you may encounter – i.e., do you have enough cash and other short term assets available to cover monthly operations?

This ratio is calculated as follows. (Cash + Marketable Securities + Accounts Receivable) / Monthly Expenses. The result is the number of months you could operate your business without receiving any additional funds. This aspect is also referred to as your Burn Rate.

Let’s break down the calculation. Cash, Marketable Securities and Accounts Receivable are all current assets. They are assets that are expected to be converted to cash within a year. Cash has already been converted, so its utility is obvious. Marketable Securities can typically be converted to cash immediately, or without significant delay. Accounts Receivable may take a little longer, depending on the terms you have extended to your customers, but it is not unreasonable to collect most of your accounts within 60 days.

Monthly Expenses refer to your monthly operating expenses that require cash. If you have employees, there is a payroll you have to fund. If you lease a building, you would owe monthly rent and utilities. Phones, equipment rentals and employee benefits to name only a few would also be Monthly Expenses. Monthly Expenses do not include depreciation and amortization because they are non-cash expenses. Costs of Sales are also excluded – they are generated by the Sales cycle which in turn generates cash.

The purpose of the Adequacy of Resources ratio is to determine how long your business would survive with no more sales. It is a hypothetical exercise, but if computed month to month, it provides valuable insight into the availability of your short term liquid assets compared to your monthly operating expenses. In analyzing the change in the ratio, you would want to understand whether your short term liquid assets have changed or whether your monthly operating expenses have changed – or both. This type of analysis will provide the timely information you need to adjust your operations and expense structure, before it becomes a problem.


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