Posted by: rongeri | October 12, 2009

The Challenge of Changing Times–Part II

II.        Are the Times Challenging? How Do You Know?

“A shoe factory sends two marketing scouts to a county to study the prospects for expanding business. One sends back a text message saying: ‘Situation hopeless. No one wears shoes.’ The other triumphantly sends a different text message: ’Glorious business opportunity. They have no shoes.’ “[i]

 “Recognizing Pablo Picasso in a train compartment, a man inquired of the artist why he did not paint people ‘the way they really are.’ Picasso asked what he meant by that expression. The man opened his wallet and took out a snapshot of his wife, saying, ‘That’s my wife’. Picasso responded, ‘Isn’t she rather small and flat?’[ii]

 As the marketing scouts story and the Picasso story illustrate, how you see something, such as challenging times, depends on your perspective. Challenging times can be defined in several ways. A two word definition of challenging times might be “right now!” and a one word definition of challenging times might be ”recession”. Whether you lean toward the one word or the two word definition, your business mantra might be simply to “survive[iii], and then to thrive.”

 One way to know if your business is in a challenging time is to look at your business ratios, value drivers[iv], and your key performance indicators in order to “survive and then to thrive”. Ratios are tools to measure, and are indicators of, business performance. Ratios can be used to assess performance or as a diagnostic tool to analyze not only what is going on, but also can be used to identify areas for intervention to prevent small manageable problems from growing into major enterprise threatening large ones. Key business financial ratios are indicators:

 Liquidity Ratios (current ratio, acid-test ratio, operation cash flow ratio etc.)(indicates ability to meet short-term immediate obligations)(for example,  current assets divided by current liabilities, current assets minus the sum of inventories plus prepayments divided by current liabilities, operation cash flow divided by total debts)

  • Profitability Ratios (gross profit margin, operating income margin, rate of return on assets, etc.) (indicates return on investment)( for example, gross revenue divided by net sales or net sales minus the cost of goods sold divided by net sales, operating income divided by net sales, net profit after tax divided by total assets, etc.)
  • Activity Ratios (asset turnover ratio, receivables turnover, inventory turnover, cash conversion cycle,  etc.)(indicates the ability to convert non-cash assets into cash)( net sales divided by total assets, net credit sales divided by average net receivables, sales divided by inventory, inventory conversion period plus receivables conversion period minus payables conversion cycle)
  • Leverage Ratios (debt to total assets, times interest earned, etc.) (indicates the extent the enterprise is financed by debt)(for example, total debt divided by total assets)

Just like periodically looking at a thermometer can tell you what is going on with the temperature, periodically reviewing your business ratios can tell you what is going on with what the particular ratio measures. But remember: looking at the temperature or ratio doesn’t tell you what if anything you can or should do about it. After you understand what, why, when, and how—you must consider and evaluate your options. When brainstorming as to options, consider everything. There may be additional uses for your product or service. You may be able to enter into strategic alliances with others to broaden your customer base. Using these numbers and other parts of your business plan in your operational analysis should help you avoid the dangerous potholes and find the appropriate detours to stay the course in difficult and uncertain economic times.

 

 


[i]           Rosamund Zander and Benjamin Zander, The Art of Possibility: Transforming Professional and Personal Life at 9.

 

[ii]           Id. At 11.

 

[iii]          See Rosabeth Moss Kanter, “Four Actions To Survive the Recession and Emerge Triumphant”. (“In these days, doing nothing is not an option. Here are four things I’ve seen work: Move while others are distracted; Announce and own a grand concept; Get rid of things that have outlived there usefulness; Concentrate on helping your users, clients, or customers succeed.) http://blogs.harvardbusiness.org/kanter/2009/01/four-actions-to-survive-the-re.html. See also Rosabeth Moss Kanter “Thinking Differently In A Recession: Today’s Whole Earth Catalog”. (“In 2009, …four Whole-Earth-type ideas are among the biggest opportunities to think differently. They are aligned with survival strategies for the recession. They can inspire innovation. [Three out of those four ideas are]: Green Awareness; Self-Sufficiency; Healthy Behaviors…”) http://blogs.harvardbusiness.org/kanter/2009/04/thinking-differently-in-the-re.html.

 

[iv]          “Understanding The Drivers of Value”, McKinsey & Company, Valuation: Measuring and Managing The Value of Companies. (“A value driver is a performance variable that has impact on the results of a business, such as production effectiveness or customer satisfaction. The metrics associated with the value drivers are called key performance indicators (KPIs). Such metrics might be capacity utilization or customer retention rates. KPIs are used both for target setting and for performance measurement.  Three principles are central to defining value drivers as well: 1.Value drivers should be directly linked to shareholder value creation and cascade down through the organization. 2 Value drivers should be targeted and measured by both financial and operational KPIs. 3. Value drivers should cover long-term growth as well as operating performance.”)


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