At June’s lunch and learn event, business expert T.D. Winters explored how you can effectively manage and measure growth for your company using the metrics that matter.
2. WHY BENCHMARK?
PURPOSE: Benchmarking your financial performance
uncovers opportunities to improve your company’s
profitability and cash flow.
PROCESS: Comparing your company’s results on certain
key performance measures against your past results or the
against peer companies in your industry to identify
opportunities for improvement. (Internal and External)
3. Types of Benchmarking
Internal benchmarking: comparing key financial
and performance indicators within your company,
including comparisons to history, budgets and
within divisions or even projects.
External benchmarking: comparing key financial
and performance indicators to other companies
within your industry.
5. Liquidity
Liquidity ratios may be the most important tools a
business owner can use to measure the financial health
of their business. These ratios are important to
internally and externally benchmark your business.
The most utilized ratios are the Current, Quick and
Days Cash on Hand.
• Current ratio – measures your current assets against
your current liabilities. Do you have what you need to
meet the obligations in place?
Current Assets ÷ Current Liabilities
6. Liquidity Ratios, continued
Some current assets may be more liquid than others so it’s
important to calculate the QUICK ratio.
• Quick ratio - reflects the extent to which the more liquid
assets are available to satisfy current liabilities.
(Cash & Cash Equivalents, Short Term Investments,
NET Trade Receivables) ÷ Current Liabilities
The higher the ratio, the more cash a business has to pay it
obligations and maintain a “cash cushion”.
7. Liquidity Ratios, continued
• Days Cash on Hand - Days cash on hand measures the
number of days that an organization can continue to pay
its operating expenses, given the amount of cash
available. Essentially it is the number of days a company
can stay in business if it makes no sales and doesn’t
collect any money from customers. The higher the
number of days cash on hand, the better.
Cash on Hand ÷ ((Operating Expenses – Noncash
Expenses) ÷ 365))
This is an effective tool for planning, especially for season
or cyclical businesses.
8. Efficiency ratios measure how effectively you’re using
current assets and managing current liabilities. They
include:
• Backlog to working capital
• Months in backlog
• Days to liquidate (days in accounts payable, days in accounts
receivable, days in inventory)
• “Bank” efficiency ratio, which can be useful in other
businesses as well. This is the ratio of overhead costs to net
revenue (e.g. sales revenue less cost of goods).
Profitability ratios, assess your ability to generate
earnings compared to your expenses. In particular, you’ll
Efficiency and Profitability Ratios
9. Efficiency and Profitability, cont’d
Look specifically at
Return on Assets (ROA) - (Net Earnings ÷ Total Assets)
AND
Return on Equity (ROE) - (Net Earnings ÷Total Net Worth)
These two sets of information will help you get an idea of how well
your company uses its money and assets to generate profit. This
information is necessary when applying for a business loan, and can
provide useful metrics for you to track your company’s health and
growth year over year. A single set of ratios at one point in time might
will be revealing, but tracking these trends over time will let you know
if growth may be masking creeping inefficiencies or the
erosion of profit margins.
10. What Next?
• Understand the limitations of industry
comparisons and the importance of historical
comparisons.
• Build a list of key performance indicators for your company
and build goals around improvement.
• Seek a second opinion from a CPA with experience in
your industry if you have concerns about the accuracy of
your data.
• Ask your relationship officer at your bank for industry ratios
for companies that are similar to your makeup.