CBB Business Operations & Profitability Assessment Flashcards

What does 'working capital' measure in business operations?

Answer: Current assets minus current liabilities, reflecting short-term operational liquidity

Working capital shows whether a business has sufficient liquid assets to cover its short-term obligations and sustain daily operations.

What is the significance of reviewing a business's accounts receivable aging report during a sale?

Answer: It reveals the quality and collectability of outstanding customer invoices

An aging report shows how long invoices have been outstanding, identifying collection problems that could reduce actual cash flow.

When assessing a business for sale, what does 'inventory turnover' indicate?

Answer: How many times inventory is sold and replaced in a given period, reflecting operational efficiency

Inventory turnover measures how efficiently a business converts inventory into sales, with low turnover indicating potential obsolescence risk.

What does 'key man risk' mean in the context of a business being sold?

Answer: The business's vulnerability to loss if a critical person—often the owner—leaves

Key man risk refers to the danger that a business's success depends too heavily on one individual whose departure would harm operations.

Which ratio best assesses a business's ability to meet short-term obligations?

Answer: Current ratio (current assets ÷ current liabilities)

The current ratio measures short-term liquidity by comparing liquid assets to near-term liabilities, with a ratio above 1 generally considered healthy.

What does normalizing a business's financials help a broker accomplish?

Answer: Present the business's true earning power by removing non-recurring or owner-specific expenses

Normalization adjusts the financials to reflect what a new owner would realistically earn, making the business more accurately comparable to others.