Using math to determine your firm's value position. (Q&A with Phil Phillips).When working with clients in strategy development, one is mainly "looking ahead" and planning for the future. To accomplish the development of a solid future plan, we always encourage our clients to make certain all the key employees are involved in the process and have a full understanding of all the elements needed to launch a strategic planning Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and people. process. We accomplish this through a MAP (management action program) analysis, which asks the participants to provide their impression of the company's positions in regard to marketing, technical and financial aspects.Not surprising, we find many people have neither a common opinion nor grounding of these important facts. Therefore, we must then make certain that their perceptions change to a common accuracy prior to future plan discussions. One of the most important elements we see missing in strategic planning is understanding a company's financials in general and in particular, the details and how those details play within the future planning tactics. Elements To Understanding The items below attempt to simplify financials and their respective meaning to running a business. There are five general and 22 specific ratios one should be familiar with and have at their fingertips "Fingertips" is a 1963 number-one hit single recorded live by "Little" Stevie Wonder for Motown's Tamla label. Wonder's first hit single, "Fingertips" was the first live, non-studio recording to reach number-one on the Billboard Pop Singles chart in the United States. to make basic evaluations of their own and other companies. We have outlined the ratio and described its meaning. Stay The Course Maintaining these key ratios in your memory or within close reference and referring to them often when planning or comparing one's firm to another, can help "stay-the-course." Or, if required, it can alter one's strategic direction and allow your firm to take advantage of opportunities.
RATIO CALCULATION MEANING
Liquidity Current Current assets The extent to
Ratios divided by which a firm can
current meet its
liabilities short-term
obligations.
Quick Current The extent to
assets -- which a firm can
Inventory meet its short-
divided by term obligations
current without relying
liabilities on the sale of
inventories.
Leverage Debt-to-total- Total debt The percentage
Ratios assets divided by total of total funds
assets that are
provided by
creditors.
Debt-to-equity Total debt The percentage
divided by total of total funds
stockholder provided by
equity creditors vs.
the percentage
provided by
owners.
LT debt-to- Long-term debt The balance
equity divided by total between debt and
stockholder equity in firm's
equity LT capital
structure.
Times-interest- Profits before The extent to
earned interest and which earnings
taxes divided by can decline
total interest without the firm
charges becoming unable
to meet its
annual interest
costs.
Activity Inventory Sales divided by Whether a firm
Ratios Turnover inventory of holds excessive
finished goods stocks of
inventories and
whether a firm
is selling its
inventories
slowly compared
to the industry
average.
Fixed assets Sales divided by Sales
turnover fixed assets productivity and
plant equipment
utilization.
Total asset Sales divided by Whether a firm
turnover total assets is generating a
sufficient
volume of
business for the
size of its
asset
investment.
Accounts Annual credit In percentage
receivable sales divided by terms, the
turnover accounts average length
receivable of time it takes
a firm to
collect on
credit sales.
Average Accounts In days, the
Collection receivable average length
period divided by total of time it takes
sales/365 days a firm to
collect on
credit sales.
Profitability Gross profit Sales - Cost of The total margin
Ratios margin goods sold available to
divided by sales cover operating
expenses and
yield a profit.
Operating profit Earnings before Profitability
margin interest and without concern
taxes divided by for taxes and
sales interest.
Net profit Net income After tax
margin divided by sales dollars per
dollar of sales.
Return of total Net income After tax
assets divided by total profits per
assets dollar of
assets: also
called return
on investment
(ROI).
Return on Net income After tax
stockholders profits per
Equity (ROE) dollar of
stockholder
equity
investment in
the firm.
Earnings per Net income Earnings
share (EPS) divided by available to the
number of shares owners of common
common stock stock.
outstanding
Growth Sales Annual divided Firm's growth
Ratios by growth in rate in sales
total sales
Income Annual divided Firm's growth
by growth rate rate in profits
in profits
Earnings per Annual divided Firm's growth
share by growth in EPS rate in EPS
Dividends per Annual divided Firm's growth
share growth in rate in
dividends/share dividends/share
Price-earnings Market price per Faster-growing
share divided by and less risky
EPS firms tend to
have high-price-
earning ratios.
Phil PHIL Philosophy Phil Philippine PHIL Philippians PHIL Philadelphia, PA, USA PHIL Public Health Image Library (US CDC) Phillips Phil·lips A trademark used for a screw with a head having two intersecting perpendicular slots and for a screwdriver with a tip shaped to fit into these slots. is founder of PGPhillips & Associates, a consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a focusing on the coatings, adhesives, sealants industries. |
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