A static analysis of these percentages at any given point in time can be useful. But a dynamic analysis, comparing the evolution of these percentages from period to period can be even more useful in seeing overall trends, and thereby knowing how resources are being allocated, what type of debt is being incurred, and how owner’s equity is being affected by operations.
This type of dynamic analysis can be performed by choosing a certain period or year as a baseline (N), and then comparing the percentages for period N with the percentages for the following period (N+1), or with the percentages from as many other periods (N+2, N+3, N-1, N-2, etc.) as you wish, in order to see the trends over the periods in which you are interested.
Parameters
Based on your experience with your business and its operations, you may be able to set some parameters or guidelines to use in analyzing the percentages and determining where actions need to be taken to make changes or modifications. The following are some examples:
Current assets (cash and cash equivalents, realizable assets, and inventory) should be greater than, and if possible double the amount of short-term liabilities.
Realizable assets plus cash and cash equivalents should be approximately equal to short-term liabilities.
Owner’s equity should amount to 40% or 50% of total liabilities and owner’s equity.
You may also use benchmarking to compare the status of your business, in terms of relative proportions of different groups of assets and liabilities, with industry standards, or other comparable operations.
Debt Characteristics
The total amount of debt your business is carrying is important, but it is also important to know what type of debt you are carrying. In this regard, it can be useful to prepare an analysis, or table of debt characteristics.
Some of the data you may want to include in this type of analysis include:
Type of debt (secured and unsecured bank loans, revolving lines of credit, bonds)
Amount of each type of debt
Interest rate (fixed, variable, and percentages)
Due dates
Annual debt servicing cost
Annual installments
Collateral provided
Having a clear picture of the structure of your debt will allow you to make decisions regarding potential alternative sources of financing, if necessary.