Benchmarking Your Foundry's Financial Performance.Tools exist to align align (  līn),v to move the teeth into their proper positions to conform to the line of occlusion. your foundry's financial results vs. the industry standard (by SIC). This article explains how to utilize such tools to improve operational performance. Business operations Business operations are those activities involved in the running of a business for the purpose of producing value for the stakeholders. Compare business processes. The outcome of business operations is the harvesting of value from assets always have been complex. In today's cyber-paced, minimum-inventory and margin-squeezed world, however, the complexities of business can seem overwhelming at times. With these day-to-day day-to-day adj. 1. Occurring on a routine or daily basis: the day-to-day movements of the stock market. 2. challenges of doing business front and center, it's it's 1. Contraction of it is. 2. Contraction of it has. See Usage Note at its. it's it is or it has it's be ~have easy to lose sight of the basic methods that exist to measure the financial success of business models. In any newspaper's business section, you'll you'll Contraction of you will. you'll you will or you shall you'll will find article after article of business failures. Weak sales, high expenses, incorrect inventories and/or and/or conj. Used to indicate that either or both of the items connected by it are involved. Usage Note: And/or is widely used in legal and business writing. lack of working capital are often cited as causes. Did this terminal "sickness SICKNESS. By sickness is understood any affection of the body which deprives it temporarily of the power to fulfill its usual functions. 2. Sickness is either such as affects the body generally, or only some parts of it. " of a business just "occur?" No, not likely. Businesses, like humans, rarely "get sick" overnight. The vital financial and operational symptoms are usually there and can be seen at a nearly stage. Oftentimes of·ten·times also oft·times adv. Frequently; repeatedly. Adv. 1. oftentimes - many times at short intervals; "we often met over a cup of coffee" frequently, oft, often, ofttimes , however, these warning signs are not measured, or if they are, their measurements are ignored. Benchmarking To paraphrase par·a·phrase n. 1. A restatement of a text or passage in another form or other words, often to clarify meaning. 2. The restatement of texts in other words as a studying or teaching device. v. J. Edwards Deming Deming may refer to:
The importance of benchmarking your position in relationship to the rest of the world is brought home in Robert Robert, Henry Martyn 1837-1923. American army engineer and parliamentary authority. He designed the defenses for Washington, D.C., during the Civil War and later wrote Robert's Rules of Order (1876). Noun 1. Camp's book Benchmarking. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Camp, "Benchmarking is the search for those best practices that will lead to the superior performance of a company. Establishing operating targets based on the best possible industry practices is a critical component in the success of every business." He also discusses the Japanese Japanese (jăp'ənēz`), language of uncertain origin that is spoken by more than 125 million people, most of whom live in Japan. There are also many speakers of Japanese in the Ryukyu Islands, Korea, Taiwan, parts of the United States, and word "dantotsu" which means to be the "best of the best." Benchmarking "best of the best" practices "leads to profitable, high-asset utilization businesses that meet customer needs and have a competitive advantage." Bench marking metalcasting process operations such as production rates and quality levels are a common practice. Financial results also should be a regular area of benchmarking activities, and should be conducted for reasons beyond satisfying a manager's curiosity. In addition to its usefulness in identifying areas for improvement, such information on financial performance relative to the industry is important when seeking funding and judging the return on your investment. One Tool One such peer financial measurement tool is the annual statement studies report compiled by the Risk Management Assn. (RMA (RealMedia Architecture) See RealMedia. ). This book contains composite financial data segregated by sales volume and asset size for meaningful financial comparisons. The book is organized in Standard Industrial Classification (SIC) numeric numeric see numerical. numeric cluster see ten-key pad. fashion. Financial statements on each SIC code are shown in common size, and are accompanied by widely used financial ratios. Balance sheets and income statements are shown with each item as a percentage of total assets and sales, respectively. Common size statements are computed for each individual statement in an industry group, and then all the figures are added and averaged. Each financial ratio has three performance values: the upper quartile Quartile A statistical term describing a division of observations into four defined intervals based upon the values of the data and how they compare to the entire set of observations. Notes: Each quartile contains 25% of the total observations. , median and lower quartile. When a given company's financial information is presented in the same format as RMA, direct comparisons are easily made. New fiscal years and quarters completed and compiled to this format will facilitate clear and concise trend analysis. Such an analysis is valuable to see where you have been and to help plan where you are going. By staying informed with your peer's financials, you can begin to focus on your company's strengths and weaknesses. Staying on top of your financials also assists in presentations to your financial institutions and allows you to discuss your action plan, which should address any weaknesses and/or superior strengths. While you will gain additional credibility with your lender by doing your homework, remember that your financial information is not for the banker, but for you. A banker wants to see what financials you use and be confident that you can understand and interpret what the statements are telling you. It is basic human nature to delay doing things you do not like or do not understand. You may be the best foundry A semiconductor manufacturer that makes chips for third parties. It may be a large chip maker that sells its excess manufacturing capacity or one that makes chips exclusively for other companies. in terms of making a specific cast product, but if you do not tend to the financials, your business could be missing some financial opportunities. Understanding what your numbers mean and how you are doing in comparison to your industry will assist in identifying these opportunities. Iron Foundry Example To illustrate how such a tool can be used by foundry managers, an RMA industry comparison of a hypothetical Hypothetical is an adjective, meaning of or pertaining to a hypothesis. See:
As you can see, the financials changed dramatically from 1999 to 2000. A-Plus Foundry saw a buildup build·up also build-up n. 1. The act or process of amassing or increasing: a military buildup; a buildup of tension during the strike. 2. of their accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying by almost $700,000 (notation notation: see arithmetic and musical notation. How a system of numbers, phrases, words or quantities is written or expressed. Positional notation is the location and value of digits in a numbering system, such as the decimal or binary system. 1) which in turn had a negative effect on accounts payable with a $305,000 increase (notation 2). As can be seen in the ratios in Table 2, this caused its receivables turnover receivables turnover See accounts receivable turnover. to increase from 9 to 35 days. While A-Plus is still under the industry average of 46 days, this is a negative change from the prior year. Because receivables Receivables An asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors or customers. Receivables are recorded by a company's accountants and reported on the balance sheet, and they and include all debts owed grew to such a high dollar amount compared to the prior year, a line of credit was needed. A-Plus then became a "bank" itself, whether it wanted to or not. By way of accounts receivables, the foundry extended credit to their customers and probably will never earn any interest on these "loans." In addition, the foundry had to pay interest on this line of credit from their bank. The extra interest expense will be reflected in other expenses on the income statement. This scenario is a common problem. Market forces often dictate TO DICTATE. To pronounce word for word what is destined to be at the same time written by another. Merlin Rep. mot Suggestion, p. 5 00; Toull. Dr. Civ. Fr. liv. 3, t. 2, c. 5, n. 410. pricing with small margins and just-in-time deliveries. This forces the foundry to carry the customer's inventory with no financial return. When quoting a job, the carrying cost Noun 1. carrying cost - the opportunity cost of unproductive assets; the expense incurred by ownership carrying charge opportunity cost - cost in terms of foregoing alternatives of the receivables and inventory should be taken into account. In a competitive environment, however, foundries may not be able to collect those costs. A necessary step in the bidding process requires a decision to be made on whether the job is truly worth the financial return and risk. Relaxing or neglecting this important step may have been the difference in A-Plus' results from the prior year. A-Plus Foundry had been high at 80.8% (notation 3) of its assets in fixed assets fixed assets npl → activo sg fijo fixed assets npl → immobilisations fpl fixed assets fix npl → in 1999 before it sold off almost $1 million in fixed assets, bringing the ratio down to 54.2% of assets (still higher than the industry average of 39.6%). The proceeds from the sale of fixed assets were used to reduce long-term debt Long-Term Debt Loans and financial obligations lasting over one year. Notes: For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt. , which will save some interest expense in the future and be used to purchase additional inventory, which in the past was not at its current high levels. The inventory (notation 4) was 8.6% of total assets in 1999 and it grew to 20.5% of total assets in 2000, which was in line with the industry average of 19.5%. From a potential lender or investor perspective, this analysis indicates a systemic systemic /sys·tem·ic/ (sis-tem´ik) pertaining to or affecting the body as a whole. sys·tem·ic adj. 1. Of or relating to a system. 2. change in the business model. Additional information would be required by those who manage the business on a day-to-day basis. The explanation in A-Plus' case was slow-paying customers who began requiring the foundry to hold large inventories. Looking at the income statement at the bottom of Table 1, sales and profits were down by $500,000 and $60,000, respectively. Relative to the industry, it is apparent that A-Plus Foundry makes its money in the operating expense Operating Expense The essential things that a company must purchase in order to maintain business. Notes: For example, the payment of employees wages are an operating expense. Also known as OPEX. area. The cost of sales is in line with the industry but A-Plus' operating costs operating costs npl → gastos mpl operacionales are 2% below the norm for this SIC. A-Plus has done an outstanding job in maintaining operating costs to these low levels, and being 2% ahead of its peers represents a savings of $200,000. Other expenses have increased primarily because of the interest expense associated with the line of credit. In a recent article in Fast Company, Walter Wriston, Chairman Emeritus e·mer·i·tus adj. Retired but retaining an honorary title corresponding to that held immediately before retirement: a professor emeritus. n. pl. of Citibank, observed, "In economic hard times, you have to shift your attention from the top line to the bottom line. Start thinking about profit, rather than revenue. Cash is king, especially when the wind blows. Get back to basics like inventory control, receivables, payables Payables Related: Accounts payable and cash flow--all those boring things that people have nearly forgotten about in the new economy. Focus on generating cash, and your company will be positioned to take advantage of opportunities that the cash-strapped can't afford." A-Plus' analysis indicates that it lacked the cash needed to bankroll bank·roll n. 1. A roll of paper money. 2. Informal One's ready cash. tr.v. bank·rolled, bank·roll·ing, bank·rolls Informal its customers' business practices. It was not able to recoup recoup To sell an asset at a price sufficient to recover the original outlay or to offset a previous loss. the cost of the money in its pricing structure and its bottom line suffered accordingly. In 1999, A-Plus' ranking among its peers was far superior in nearly every area. Over the course of only one year, however, its performance more closely resembled the industry. If A-Plus continues to serve as a "bank" for their customers, it may want to consider changing their name to "A-Plus Bank & Foundry." A bank that does not charge interest, however, will not be a very profitable business. Additional valuable financial management information can be obtained from the "sources and uses" column. At a glance, A-Plus managers can determine its sources of cash and how these funds were used during the analyzed an·a·lyze tr.v. an·a·lyzed, an·a·lyz·ing, an·a·lyz·es 1. To examine methodically by separating into parts and studying their interrelations. 2. Chemistry To make a chemical analysis of. 3. period. In this case, the principal sources of funds were notes payable--$600,000, accounts payable--$305,000, profit--$200,000 and most importantly Adv. 1. most importantly - above and beyond all other consideration; "above all, you must be independent" above all, most especially , the sale of fixed assets--$970,000. The major uses include cash--$249,000, accounts receivables-- $679,000, inventory--$760,000 and longterm debt--$334,000. Taking Action The financial benchmarking analysis also is useful for spotting manufacturing improvement opportunities that would increase the bottom line. For instance, if work-in-process figures start increasing, it may alert you to the fact that a capital expenditure in the finishing department might be needed. If your cost of sales "molding" expense increases, maybe it's time It's Time was a successful political campaign run by the Australian Labor Party (ALP) under Gough Whitlam at the 1972 election in Australia. Campaigning on the perceived need for change after 23 years of conservative (Liberal Party of Australia) government, Labor put forward a to consider a new molding system to increase production rates. Decreasing scrap is a sure way to positively affect bottom line results. The examples cited are only a few of the ways that a financial measurement tool can be used to benchmark your business methods and results. Just as foundries regularly use spectrographic analysis Noun 1. spectrographic analysis - the use of spectroscopes to analyze spectra spectrometry, spectroscopic analysis, spectroscopy, spectrum analysis chemical analysis, qualitative analysis - the act of decomposing a substance into its constituent elements to produce a quality casting, financial analysis and benchmarking is a vital part of a quality business plan.
Table 1. Balance and Income Statements for 2000 and 1999
(With RMA Analysis)
NAME: A-PLUS FOUNDRY COMPANY
CPA: BANK OF GRAIN VALLEY
FISCAL YEAR END: DECEMBER
31-Dec-2000 SOURCES & % OF
DOLLARS USES
ASSETS
CASH & EQUIVALENTS 256,000.00 (221,000.00) 4.4
ACCOUNTS RECEIVABLES (1) 952,000.00 (679,000.00) 16.3
NOTES RECEIVABLES 0.00 0.00
INVENTORY (4) 1,200,000.00 (760,000.00) 20.5
ALL OTHER CURRENT 145,000.00 (45,000.00) 2.5
TOTAL CURRENT 2,553,000.00 43.6
FIXED ASSETS (3) 3,175,000.00 970,000.00 54.2
INTANGIBLES 0.00 0.00 0.0
OTHER NON-CURRENT 130,000.00 9,000.00 2.2
TOTAL ASSETS 5,858,000.00 100.0
LIABILITIES
NOTES PAYABLE-ST 600,000.00 600,000.00 10.2
CURR. MATURITY-LTD 150,000.00 (5,000.00) 2.6
ACCOUNTS PAYABLE (2) 840,000.00 305,000.00 14.3
ACCRUED EXPENSES 150,000.00 (40,000.00) 2.6
OTHER CURRENT 0.00 0.00 0.0
TOTAL CURRENT 1,740,000.00 29.7
LONG TERM DEBT 80,000.00 (334,000.00) 1.4
OTHER NON-CURRENT 0.00 0.00 0.0
NET WORTH 4,038,000.00 200,000.00 68.9
TOTAL LIABILITIES & NET WORTH 5,858,000.00 0.00 100.0
INCOME DATA
NET SALES 10,000,000.00 100.0
COST OF SALES 7,800,000.00 78.0
GROSS PROFIT 2,200,000.00 22.0
OPERATING EXPENSE 1,675,000.00 16.8
OPERATING PROFIT 525,000.00 5.3
ALL OTHER INCOME (EXPENSE) (150,000.00) -1.5
PROFIT BEFORE TAXES 375,000.00 3.8
TAXES 175,000.00 1.8
NET INCOME 200,000.00 2.0
RMA SIC# 31-Dec-99 % OF
3321 DOLLARS
ASSETS
CASH & EQUIVALENTS 7.3 35,000.00 0.7
ACCOUNTS RECEIVABLES (1) 25.7 273,000.00 5.3
NOTES RECEIVABLES 0.00
INVENTORY (4) 19.5 440,000.00 8.6
ALL OTHER CURRENT 1.8 100,000.0 1.9
TOTAL CURRENT 54.3 848,000.00 16.5
FIXED ASSETS (3) 39.6 4,145,000.00 80.8
INTANGIBLES 0.4 0.00 0.0
OTHER NON-CURRENT 5.7 139,000.00 2.7
TOTAL ASSETS 100.0 5,132,000.00 100.0
LIABILITIES
NOTES PAYABLE-ST 9.8 0.00 0.0
CURR. MATURITY-LTD 4.6 155,000.00 3.0
ACCOUNTS PAYABLE (2) 9.8 535,000.00 10.4
ACCRUED EXPENSES 0.1 190,000.00 3.7
OTHER CURRENT 6.7 0.00 0.0
TOTAL CURRENT 31.0 880,000.00 17.1
LONG TERM DEBT 20.6 414,000.00 8.1
OTHER NON-CURRENT 4.1 0.00 0.00
NET WORTH 44.3 3,838,000.00 74.8
TOTAL LIABILITIES & NET WORTH 100.0 5,132,000.00 100.0
INCOME DATA
NET SALES 100.0 10,500,000.00 100.00
COST OF SALES 77.6 8,225,000.00 78.3
GROSS PROFIT 22.4 2,275,000.00 21.7
OPERATING EXPENSE 18.9 1,720,000.00 16.4
OPERATING PROFIT 3.5 555,000.00 5.3
ALL OTHER INCOME (EXPENSE) 1.0 (100,000.00) -1.0
PROFIT BEFORE TAXES 2.5 455,000.00 4.3
TAXES 195,000.00 1.9
NET INCOME 260,000.00 2.5
Table 2. Ratios, Other Accounts and Statement Recap
NAME: A-PLUS FOUNDRY COMPANY
CPA: BANK OF GRAIN VALLEY
FISCAL YEAR END: DECEMBER
RMA SIC 3321
RATIOS 31-Dec-00 RMA 31-Dec-99
CURRENT 1.5 2.0 1.0
QUICK 0.7 1.3 0.4
SALES/RECEIVABLES 10.5 7.9 38.5
RECEIVABLE TURNOVER-DAYS 35 46.0 9
COST OF SALES/INVENTORY 6.5 9.8 18.7
INVENTORY TURNOVER-DAYS 56 37.0 20
COST OF SALES/ACCOUNTS PAY 17.6 16.1 45.0
ACCOUNTS PAYABLE TURNOVERS 21 23.0 8
SALES/WORKING CAPITAL 12.3 9.0 -328.1
EBIT/INTEREST 6.0 2.1 15.7
CASH FLOW/ CURR. MAT.-LTD 7.1 2.2 6.8
FIXED/WORTH 0.8 0.8 1.1
DEBIT/WORTH 0.5 1.5 0.3
% PROFIT B.T./TAN. NET WORTH 9.3 8.9 11.9
% PROFIT B.T./TOTAL ASSETS 6.4 4.3 8.9
SALES/NET FIXED ASSETS 3.1 5.3 2.5
SALES/TOTAL ASSETS 1.7 1.9 2.0
% DEPR., DEP., AMORT/SALES 8.6 3.4 7.5
% OFFICERS COMP/SALES 0.0 4.0 0.0
OTHER ACCOUNTS 31-Dec-00 31-Dec-99
INTEREST EXPENSE 75,000.00 31,000.00
DEPR., DEP., AMORT. 860,319.98 789,805.20
LEASE & RENTAL 0.00 0.00
OFFICERS COMP. 0.00 0.00
DIVIDENDS 0.00 0.00
OTHER CHARGES 0.00 0.00
STATEMENT RECAP 31-Dec-00 31-Dec-99
CASH 256,000.00 35,000.00
CURRENT ASSETS 2,553,000.00 848,000.00
CURRENT LIABILITIES 1,740,000.00 880,000.00
NET WORKING CAPITAL 813,000.00 (32,000.00)
TOTAL LIABILITIES 1,820,000.00 1,294,000.00
TOTAL NET WORTH 4,038,000.00 3,838,000.00
CURRENT RATIO 1.47 0.96
DEBT/NET WORTH 0.45 0.34
TOTAL ASSETS 5,858,000.00 5,132,000.00
TOTAL SALES 10,000,000.00 10,500,000.00
GROSS PROFIT 2,200,000.00 2,275,000.00
NET INCOME BEFORE TAXES 375,000.00 455,000.00
NET INCOME 200,000.00 260,000.00
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