While at Daimler Truck North America, I had a group that spent in excess of $10 million a year (back then). I was not a profit center. I was an expense center. Yearly I had to put together a zero-based budget. Monthly I had to review my results and annotate for the CFO group any and all deviations of significance. I believe it was 5% difference from plan. When I wanted to put in a $10 million dollar test and validation lab, I can recall sitting in the CFO’s office to defend the project and commit to the measurement of cost savings that would accrue through reduced warranty and recalls. I learned a lot about the finances of a public company through that and my own investments and through the company’s incentive compensation plan. When we went through a cost reduction effort two decades ago, financial metrics were a key part of the daily and weekly routines.
So many of the businesses I work with are trying to raise funds, managing cash flow, minimize taxes, determine if they can hire another person, or buy a piece of equipment. It all comes down to better understanding your business plan, your assumptions, and your strategies and ability to grow the company profitably. Steve LeFever of Profit Mastery said, “The only difference between a business plan and a loan application is the cover page.” That suggests you should think like a banker or investor.
Do you know what a BIC is? No, not the pen and lighter company. I’m talking about the Business Identifier Code (BIC) assigned to a bank. It may also be known as the SWIFT code (I like that term because it suggests speed and acceleration) for International transfers of money between banks. I also like to think of BIC as the three most important financial documents for any business that you should track monthly, and UNDERSTAND, and use to develop the goals for your business to grow profitably. In this case
B is for the Balance Sheet,
I is for the Income Statement often called the Profit or Profit/Loss Statement,
C is for Cash Flow.
That’s BIC for Balance, Income, Cash.
Likely the first thing a banker will ask you for is those three financial statements for the last 3 years. And he and any investors will want to understand those documents going forward for 3-5 years to see the planned results of taking their money as an investment.
You won’t need fancy mathematics from artificial intelligence, calculus, vectors, or even geometry or algebra. You will need simple add, subtract, multiply, divide, and, from your 6th grade math classes, an understanding of ratios. There are 14 ratios or metrics you should watch and compare to others in your industry. Some of the 25 below may be identical but with different names, or very similar. I have highlighted with numbers the 14 proposed by Profit Mastery and with letters the 14 proposed by 60-Minute CFO Academy. These include:
- Current Ratio (1) (A)
- Quick Ratio (2)
- Debt-to-Equity Ratio or Debt-to-Worth or Debt-to-Networth Ratio (3) (B)
- Gross Profit Margin or Gross Margin (4) (C)
- Operating Profit Margin (D)
- Net Profit Margin or Net Margin (5) (E)
- Sales to Assets Ratio (6)
- Return On Assets (7)
- Return On Investment (8)
- Return On Equity (F)
- Receivable Days (G)
- Inventory Days (H)
- Inventory Turnover (9)
- Inventory Turn-Days (10)
- Payable Days (I)
- Survival Score (J)
- Revenue per Administrative Employee (K)
- Operating Cash Flow Margin (L)
- Financing Cash Flow Margin (M)
- Net Cash Flow Margin (N)
- Markup Percentage
- Accounts Receivable Turnover (11)
- Accounts Receivable Turn-Days (12)
- Accounts Payable Turnover (13)
- Average Payment Period (14)
- Client Cost of Acquisition
Unfortunately, this is like a foreign, unintelligible language to most people outside of the finance department. And, there are many more that can be used such as R&D as a percentage of sales, General & Administrative as a percentage of sales, EBITDA as a percentage of sales (Earnings Before Interest Taxes Depreciation and Amortization), just to name a few. Fortunately, software and spreadsheets can handle all of the details of the calculations (assuming good data is input). Put YOUR time and effort into understanding what all those numbers (and graphs which I prefer) mean to how well you are running your business and how to grow it profitably.
The best companies teach everyone about the numbers and share them as much as possible. That way everyone understand why they are being asked to make those challenging calls to customers asking them to pay so that you can reduce accounts receivables. It can help a salesperson understand why a customer is being asked to pay some money up front or pay for tooling. The people on the shop floor can gain a better understanding of the impact of waste and how it affects inventory turns.
Think like a banker or investor as you plan your company. Don’t fall for the comfort of a life-style business. Profitable growth is an imperative.
If you’d like to learn more, check out 60 Minute CFO® Academy at: https://www.60minutecfoacademy.com/?ref=617b2d or let’s talk https://calendly.com/paul-ba
