Let’s say you’re looking for a full-time position and you get a good offer. What are the odds you’ll actually get paid week in and week out?
Usually the chances are pretty good — most companies have the cash they need to pay their employees. But if the offer is from a start-up, you’ll naturally want to be more careful. And that’s not the only situation requiring caution. Maybe your prospective employer has been growing rapidly. Or maybe it has been through some rough times and is only now beginning to turn around. In both cases, it could easily be strapped for cash.
How can you tell whether the company can afford you? There’s a simple financial ratio that is a pretty good indicator. Here’s how to figure it.
First, get a copy of your prospective employer’s balance sheet. If the company is publicly traded, go to its website and click on the most recent financial statements. If it’s privately held, explain to your contact there that you’re glad to sign a nondisclosure agreement, but you really need to see the financials before you sign on. Some companies will balk at the request, but that by itself might be enough to disqualify them. (What do they have to hide?)
Once you get the balance sheet, calculate what accountants call the current ratio. Just take “current assets” (on the Assets side of the balance sheet) and divide it by “current liabilities” (on the Liabilities side). Current assets refers to the company’s cash, plus what customers owe, plus inventory and anything else that’s likely to be converted into cash over the next twelve months. Current liabilities means obligations the company is going to have to pay out over the same period.
Ideally, the current ratio should be well above 1.0. If it’s below 1.2, that’s a big red flag. There’s a good chance the company is tight for cash, especially if the ratio has been heading down. Your prospective employer might not be able to make payroll. Ask the folks there to explain what’s going on before you agree to take the job.
We think this kind of conversation should be part of every hiring discussion. Of course, it may be an uphill battle. One of us, Joe, is part owner of a small manufacturing company called Setpoint. If Joe’s around when a job candidate is interviewing, he always offers the candidate a chance to review Setpoint’s financials. So far, exactly zero candidates have taken him up on the offer. We suspect it’s because they wouldn’t know what to look for.
But now you do: the current ratio. A little financial intelligence will help you assess your future. Besides, who knows? It may even impress your interviewer enough to move you to the head of the line.
Originally published on Harvard Business Review Blog.