Straight To The Point

It's Quick! It's Current! It's Gross! It's A Financial Ratio!

 

 

Financial reports can hide a multitude of false positives.  Sales have increased but your best customer has fallen to number five.  Assets have increased dramatically but it’s because you really have too much inventory.   Your gross margin is 15% and you have cut everywhere imagineable. 

 

It’s very tempting to just use your accounting software to get the reports and then forget them until, oh say, disaster strikes. (Do NOT get me started on the “trusted bookkeeper” subject!)  Here’s a way to really get in touch with your true financial position and make sure your company is going where you want.

 

There a number of ratios that compare one set of data with another. You should look at them over time as trends preferably years but start looking as soon as possible.

 

A one time order can make a great profit for one day or one month.  Does it make up for a series of lackluster profits over six or eight months? Can you find another one time order when you need it or should you cut expenses? Layoffs are a quick simple (I didn’t say easy) fix to increase profits unless you have to increase overtime.  Once again a short term solution to a perhaps long term problem.

 

Another important consideration is checking your ratios against similar companies within your industry.  A grocery store won’t have the same ratios as a software developer or a high end bicycle manufacturer.  That doesn’t mean these companies don’t have happy owners; it means they understand the uniqueness of their operations.

 

The Missouri SBDC has seventeen different ratios listed under four categories: Liquidity, safety, profitability and efficiency.  We will discuss several but it is by no means comprehensive.  Make sure you know the ratios most important to your company.

 

Liquidity

 

Can you pay your current obligations as they come due? This is all about how much cash you have and what can you convert to cash if necessary. There are two ways to look at it.

 

Current Ratio: The ability to pay today’s bills with today’s money. Take all current assets (cash, accounts receivable, inventory) and divide it by current liabilities.  General rule of thumb? 

 

Total Current Assets/Total Current Assets = 2 or a ratio of 2:1

 

Quick Ratio: Also called the acid test it does not include inventory. Can you meet your current obligations without selling inventory?

 

All Quick Assets/Current Liabilities = 1 or a ratio of 1:1

 

Profitability

 

If you don’t have a profit there is no cash to run the business even if there is money in the bank.  On the other hand a high profit does not necessarily mean high cash reserves.  Both liquidity and profitability must be analyzed at the same time.

 

Gross Profit Margin: How well can your business generate a return by addressing inventory control, pricing and production efficiency.  There is no rule of thumb ratio here except you want it trending upward from 0 towards 1.

 

Gross Profit/Total Sales 

 

Net Profit Margin: This ratio shows the competence of the company to manage its operating expenses and can indicate if there is enough sales volume to cover fixed costs and still make a decent profit.  You get to decide what the right number is here.

 

Net Profit/Total Sales

 

Efficiency

 

This is how you judge your assets on both value and how effectively they are utilized. Remember you may need to turn some into cash or you may use them as part of a sale agreement.

 

These two categories are often discussed when there is a downturn in the economy.  Demand your customers pay quicker and don’t pay your creditors as quickly.  A slippery slope as you may alienate your best customers and annoy your vendors both of whom you need.  May be the right thing to do but don’t make it a knee jerk decision. Think long and hard about changing your terms.

 

Accounts Receivable:  This assumes you have accounts receivable.  Many companies are credit card only, Paypal or some other sort of cash in advance. It is the best possible way.  If you can’t do that here are the two ratios you need.  The first you want a high number.  The second should be as low as possible.

 

Total Net Sales/Accounts Receivable = AR Turnover

 

365 Days/AR Turnover =  AR Collection Period

 

Accounts Payable: How well you use early pay discounts or how long you are holding on to your money can be seen here.  Like accounts receivable you may have very little if the vendors you are dealing with may want their money up front too.

 

Cost of Goods Sold/Accounts Payable = AP Turnover

 

 

Become familiar with these terms and any others that affect your business.  They are tools.  Just like you wouldn’t refuse to look at the ads you are running or address a customer service problem financial ratios and reports indicate if you are getting what you want from the blood, sweat and tears you have been and will continue to pour into your business.  It’s the only way really.

Isolation. Arrogance. Stupidity. Failure.

These are the steps that too many companies follow. Whether the company is large like AIG and staff becomes the buffer or the company is small and the approach is simple avoidance the results are the same.

Isolation, like denial, is a warm and fuzzy place.  Unlike denial isolation is not the first step towards better thoughts and ideas. It can be a permanent stop.  Worst of all the folks who become isolated are often jeered behind their backs and sometimes on the front page of The New York Times.  Favorability ratings of Condolleezza Rice dropped after she was discovered buying shoes in Manhattan while people in New Orleans were standing on the roofs of their houses waving at helicopters during Hurricane Katrina.  Napoleon Bonaparte isolated himself within his army and probably never realized that Waterloo would become synonymous for a final crushing defeat.  Unabomber Ted Kaczynski was completely alone in his Montana cabin where he plotted against the government.

Isolation leads to arrogance.  Arrogance is the outward manifestation of overblown pride and excessive self-worth.  It is another of those traits that is usually accepted only by those who have to.  A perfect example is Leona Helmsley who required her household staff to line up outside in full uniform to welcome her back regardless of the time of day. Arrogance is flying your private jets for a day to Washington at a cost greater than the annual poverty rate of a family of four and then asking for a bailout of failed management policies.  Arrogance is knowing your product offering is so necessary that you won't spend the money to better train the customer service staff because who cares?

Arrogance breeds stupidity.  Stupidity denotes an incapability or unwillingness to properly consider  relevant information.  This is the best definition of stupidity ever for businesses. Relevant information must always include financial statements.  Refusing to look at them doesn't make them less intimidating. It must always include analyzing the value of the product or offering on a regular basis.  There are people who are LP connoisseurs who only use turntables to listen to music.  Not many but maybe it's you.  Just because you know everyone in America dedicated to record players is it worth turning your hobby into a business?  If you refused to associate with people who listened to CD players and ipods and then felt puffed up over your connections you might just be dumb enough.  Finally, relevant information must always include the economic environment.  If you use receivables as a back up to your credit line then you need to make sure your customers have done what they need to do to make sales and order more.  Or, like one of Lear's plants, you'll have to close for an entire month instead of the normal two period over the holidays and pray to the might automotive gods that it's enough.

No business owner wakes up in the morning and says "I think I'll lead my company to failure today." Unfortunately stupidity generally has nowhere to go but failure.  It may take three months or three years or three decades.  It can happen so quickly that you never saw it coming or it can feel like the slow march of death.  Either way it's not what you planned even if you became isolated, arrogant and stupid. Your customers may mourn your business failure.  They may be furious because they tried to tell you but you wouldn't listen.  They may be glad as the new owner or competitor learns from your mistakes and offers a much better service or product.

Pay attention to your surroundings.  Make sure they include naysayers as well as supporters.  You get to make all the decisions anyway.  You'll want to hear every point of view because after isolation the chances of failure become exponentially larger.

Companies and Marriages Change Over Time

There's an old story about a college age son who toasts his parents at an anniversary party on the amazing skill of staying married to the same person for 25 years.  The parents look at each other, laugh and reply "This isn't the same person at all!".

All of us who have been married for a while understand that.  Marriage usually includes children, loss of parents, moving, financial pressures, job changes, etc.  These experiences shape us and how we respond to them singly and as a couple determines whether or not the marriage will succeed. We need a different set of skills at each new stage. 

Businesses are the same.  There is no more exciting stage for entrepreneurs than start up.  The new idea is thrilling and when the idea starts generating cash we can hardly believe we would ever want be anywhere else.

Then the experiences start.  Meeting payroll, paying rent, deciding how much to allocate for client acquisition.  Now entrepreneurs are working on the company as opposed to the idea.  The thrill is a little less. You start to relate to the yells of TGIF by your employees.  You never had to wonder before if missing your daughter's dress rehearsal is a fair trade-off.

You can't be a visionary and a manager at the same time.  They are entirely different.  One looks forward.  The other looks back.  Can the same person do it?  Of course.  Small business owners do it all the time. But it does change the texture of how they view what they are doing.

Decide on an exit strategy. Maybe it's never.  Maybe you'll pass it on to your children.  Maybe, like in a marriage, there's a deal breaker that means you're out.  But think ahead.  It'll help your business and your marriage.

Never Sleep With An Elephant

I have always encouraged caution to companies that sleep with an elephant.  If it rolls over you're dead.  I know how crushing that is because I have done it and been killed.  Too bad I was never hired as a consultant to General Motors.

Now the elephant itself is dying.  The companies that have been sleeping, albeit in fits and stops over the last couple years, are wide awake.  They are desperately seeking solace from the great elephant hospice -Uncle Sam.  Except the hospice is encouraging the elephant to stop fighting. Just let go it counsels.  Poor elephant is simply delaying the inevitable they say.

Of course the immediate family, Lear, Magna and American Axle who used GM receivables as the back up to their credit lines, are the least able to want to let go.  Their own stock prices are cratering and market caps are actually in a number range regular people can understand. Boo Hoo they are wailing.  No matter that they didn't Black Swan their futures. There are plenty of people on the Fortune 500 List of Richest People who can afford to buy any one of them lock, stock and barrel.  Foreign investors must be swooning. 

Unfortunately the cities around Detroit like my hometown Toledo are swooning too but for the opposite reason.  "When Detroit gets a cold Toledo sneezes" is a common saying here.  Voting against legislation that didn't support the auto industry was heresy.  Situated at the intersection of I-75 and I-80/90, setting on the navigable Lake Erie and within 50 miles of at least eight major universities Toledo seems at the perfect spot for all kinds of transportation hubs and distribution centers.  But like many small cities close to large industrial centers Toledo kept its scarce resources focused on an elephant. It was warm and restful for nearly 100 years.  Now Toledo finds itself walking behind the elephant and everyone knows what that gets you.

It's easy for small businesses to get in this position.  Don't let it happen to you.  Learn from OPM - other people's mistakes - and you won't have to find yourself begging for the other OPM - other people's money...like your neighbors.  It might be painful but you'll be able to respect yourself in the morning.

How Can You Be In Business And Hate Business?

I was scheduled to work with a client today at 9 a.m. and planned to be done around 11.  My client runs a center for women in transition - a place where she holds a space open for each one to decide the next step in their lives.  It has been a dream of hers and is in the second year of its brick and mortar existence.

She has struggled with the business aspect of it knowing it had to at least pay for itself so she could continue creating the content for programs and retreats that have the real potential for financial freedom.

In order to remove herself from the daily management of the center she brought in several "partners" who offer holistic services and would host the open times.  Each partner was supposed to do one event each month that was free for the members.  The rest of the time they were welcome to bring in their own clients and use the space as they wished.  She is compensated by the number of clients each brings in monthly.  Her responsibility to them is sending out a newsletter highlighting each one once and then listing them as a group each week.  She was quite blunt that she was offering them space and they would be responsible for getting their own clients.

She has already decided that method of getting a return on her offer of space is not working.  Instead she plans to offer levels including facility rental, associate and partner.  So far so good at least in my mind.

She was upset as the "partner" who was scheduled for open time today so we could work together didn't show up on time.  People started coming in and our session was delayed until the partner came in a little after 11.  I was scheduled somewhere else and so the conversation my client so desperately needed was not possible.

I asked why she continued having this woman as part of her circle and she said she just hated the business part of her work...she could not do it.  Fortunately I knew this was just part of the process and I offered to run the business end for an entire month.  During that time I told her to stay away from the center and focus on what she really wanted to do.

She proclaimed that scary.  I agreed.  Be careful what you wish for.  On the other hand not everyone is cut out to do the management of a project especially when they have such vision and leadership gifts. You cannot do both.  They are different mindsets. 

What will she ultimately decide to do?  Not sure.  I was encourage when as I left she said, "It's my business and it's all on me to be successful".  Ah, the morning had surely not been wasted.

When Did Mentor Become Coach?

I am surprised at how many business coaches there are.  A Google search yields 208,000 responses. All say you don't need specialized training or certification but there are companies that provide just that. It's probably a good thing as the prices per hour average $275 for phone conversations with different levels for face to face meetings or email coaching.  There are even goal coaches that spend five minutes a week holding your feet to the fire.

According to Wikipedia mentoring and business coaches are not the same thing. "Mentoring involves a developmental relationship between a more experienced "mentor" and a less experienced partner, and typically involves sharing of advice. A business coach can act as a mentor given that he or she has adequate expertise and experience. However, mentoring is not a form of business coaching. A good business coach need not have specific business expertise and experience in the same field as the person receiving the coaching in order to provide quality business coaching services."

Interesting. Mentors and mentees have a difference in experience in a specific field that is reduced through development of the mentee.  Business coaches are not industry specific but can offer mentoring as part of their offering.

Okay.  So does that mean coaches are only for small businesses as large companies probably have plenty of people who want to help others climb the corporate ladder? Mmmm, no. That leads to whole lots of politics generally and, well I don't care about corporate mentors or ladders.  I am interested in entrepreneurs. So what should small companies do if they need to seek outside advice?

Here are a few guidelines.

• If you are not able to get a recommendation then look for someone who has some sort of credentials or certification.  It's not a guarantee by any stretch but they do have a code they have to live by.  It's a good start.

• Decide exactly what your goals are.  Do you need to expand, increase sales or hire staff? These are all vastly different and you may hire different coaches for different issues.

• Be clear on how long do you plan to work with a coach?

• Keep an open mind.  You didn't hire them to be "yes men".  (Shoot you could have just assigned that to a staff member.) You hired them to move your company forward.

• Expect changes in your staff as you change.  They may be a little wary of your new way of thinking.  That's okay. Maybe they need coaching too although mentoring might be a better idea.

Coaching is a personal experience.  You want it to be a positive one.  Spend as much time investigating potential providers as you would on selecting a new car.  In fact do it right and you may be buying the car of your dreams much sooner!

Can You Wait A Minute or A Year?

I met a woman yesterday who consults with people on how to eat SOUL food: seasonal,  organic, local.  Another one is a time management consultant who teaches people how to pack less into their days and get more done. It got me thinking about how many small business owners have adopted publicly held companies' values and made short term decisions the norm rather than the exception.

Here are some great short term decisions: Calling 911, cleaning up a spill in a store, calling someone into work when another calls in sick.  There are plenty more but you get my drift.

Here are some terrible short term decisions: Cutting out advertising for the next month because sales were a little short, using personal money to cover payroll the second, third and fourth times, hiring a loser because if he could get your sister to marry him he must be the greatest salesman in the world.

When did we start - in the business sector - measuring ourselves against an illusory time frame? It started in the early 1980s I think.

In my own small manufacturing company back then we looked at our monthly sales figures, payroll, etc. We knew within a couple days of the end of the month if our balance sheet looked odd or our numbers from the year before were better or worse.  But we didn't cut sales and marketing because that was a yearly plan put into place in January.  We were somewhat seasonal so we tweaked it but we didn't spend any significant time deciding what to do "this month".  We didn't lay people off at the drop of a hat.    We weren't so obsessed with cutting fat until we reached muscle and started to bleed. Really, a thing of beauty. Why?  We didn't have to report to anyone but ourselves.

This made for some very interesting discussions in one of my MBA classes.  Even then people were obsessed about making bigger and bigger profits even if it meant enjoying it less.  They could not even imagine that profits were not necessarily the end all and be all.  (I never finished my MBA for that reason.)

Still, making sure profits were achieved was just a quarterly issue.  We always knew who was publicly held either by cutting prices to get sales from us and requests to return product we had sold to others.  We laughed at the absurdity of having to measure one's self in three month increments. On the other hand Gordon Gecko's declaration that "Greed is good" struck a nerve in the minds of people who saw Wall Street and all its machinations as the guide to wealth.

Then, at the end of the Eighties came the internet.  My teenage daughter cannot fathom watching a war (the Persian Gulf conflict under Bush 41) on a computer screen at 2500 bps during the day at work.  Or that people envied my ability to do that.

Time started to feel less scarce as computers became not just data collectors but interpreters as well. I didn't need three weeks to do all the analysis for the annual sales meeting.  I needed one day to download all the data to spreadsheets.  Then I spent a day looking them over and making recommendations. The third day I discussed them with other people in the company.  By the next week the sales people had their territories information on large floppy disks they could look over before our meeting.  It saved time for me, for the sales people and for the restaurant that held our dinner meeting. 

Saving time became addictive.  No need for a secretary to type my letters.  I could do it myself on Word.  No need for a secretary to take calls.  I could do it myself with a cell phone (back then it was connected to my car but I digress).  No need for a secretary to open the mail.  Most of the orders came in and invoices went out by fax. 

Accounting knowledge became far less important as software became more sophisticated. No need for dedicated accounts receiveable or accounts payable clerks. I saved time by looking at the books on my own terminal.

No need to stop for lunch.  I could fax in my order and have it delivered.  No need to call someone for a quote.  I just looked them up on the computer.

I literally saved myself so much time I could not get everything done.  I went to time management classes at 6:30 a.m.  It was so burdensome, this saving time, that I threw MyTime against the wall. (Caveat: It was a great system just not for me.)

Websites became so numerous that I couldn't use my program to surf a new site every 30 seconds so I saved time by bookmarking the ones I liked.  Audiobooks saved time because I could listen on my commute rather than sit down for an hour or so.  Fast food drive throughs and salad bars at Kroger provided sustenance.  Microwaves became reasonably priced and actual cooking was no longer absolutely necessary. Thank goodness because who had time for that?!

It spilled over into the way we thought about our companies. What about today? What about today? What about today?  New business owners became as obsessed with short term goals as public companies were.  What if your company had the exact product or service venture capitalists might support?  They only cared about profits and how fast you could gear up to get them.

We forgot why we went into business.  Or we went into it for the wrong reasons.  We lost our entrepreneuralism.

This is a remarkable moment in our economic history.  It has forced us to remember that short term gains are not sustainable in the long term.  It has forced us to look at large publicly held companies and accept that we do not need to emulate their methods to be successful in our own.  It has given us an opportunity to take time and figure out what is best for our selves and our businesses.

Let's decide to take quality over quantity whether it's decision making, eating or customers.  By doing so we can change the world. 

Thinking Through With Paper And Pencil

I have rediscovered the BCG matrix.  I used it a million years ago in grad school but it became less important with software that would "give" me the answer.  But lately I've come to the conclusion that whether I am using it for personal decisions or business strategy the matrix forces me to make difficult choices easier to avoid when data is buried in spreadsheets.

The matrix is pretty simple. Place your products, services or whatever based on their market shares and growth rates.  (I did one once on all my friends' boyfriends.  Please note: One person's opinion of the appropriate quadrant is not necessarily shared by others.  Keep that in mind when doing this as a collaborative effort.)

Here's a brief overview of what each means.

Dogs are low market growth, low market share.  I never liked using this designation because it just seems disrespectful.  Dogs may be new products or services that arrived too late to take advantage of a market.  More commonly, I think, they are products that were once stars or cash cows but the market has changed.  Either way someone usually has an emotional connection (our first product, the CEO's favorite, etc.) that keeps them in the mix.

Having said that there can be value in dogs.  The Long Tail was first coined by Chris Anderson in an October 2004 Wired magazine article to describe the niche strategy of businesses that sell a large number of unique items, each in relatively small quantities.  If you have a small quantity or not a lot of time this is not for you.

Cash Cows have high market share, low market growth.  I love cash cows because these products just make money without a lot of effort.  On the other hand there isn't a lot of room to expand the market.  It has either moved on or it's saturated.  Ever notice how your cell phone supplier is more eager to tell you how appreciated you are?  It's because the goal now is not getting new customers, it's keeping them.  They talk in terms of retention not new sales.  Makes for a lot better customer service.

Stars are fab.  They are high market share and high market growth.  It's the category that gets people excited.  Two things have to happen.  One the market has to be ready to embrace the product/service and the market has to be large enough to sustain the embrace for a long enough time to make a profit, sell the company or attract investment. Hold on too long and they become dogs.

Question Marks (also known as Problem Children) keep business owners up at night.  They currently have low market share but high market growth.  They have great potential but at what cost?  If you can get a powerful marketing and sales program they might become stars or cash cows.  On the other hand they might just drain resources from other great ideas.

Mind Tools notes on its website pages for the Boston Matrix: Be careful about the lines - there's nothing magical about them or their position.  There may be very little real difference between a "Problem Child" with a market share of 49% and a "Star" with a market share of 51%.  It's also not necessarily true that the line should run through the 50% position.  As ever, use your common sense.

Take the time to make a chart.  Get out a pencil and put your products or services or professional skills in each slot.  Ask a trusted friend or mentor to do one separately.  Compare them.  Decide what you will do with each entry.  Invest more, invest less, do nothing, say good-bye?  Regardless of how you handle each one you will emerge with a better of idea of who you are and what you do.

How Do You Know Unless You Look?

I designated the last twenty days of November to hammer out the final strategy and tactics I was going to use to reach my goal of having the biggest, best business video website on the internet. 

I am exhausted.  I joined extra social networks, looked at a million websites, ordered books and ezines and it's only been four days. But how do you know who and what you need and where to find it?  How do you know when to stop? 

I stopped today - looking for external experts to reinforce my expertise in my own mind.  Yes, I had to look for many hours four days straight.  What I discovered was I had something to offer.  All I have to do is put it out there, market like crazy and expect great results.