Have you been to a movie lately? After you buy your large tub of buttered popcorn, your tray of pretzels, cheese dip and Diet Coke (you wouldn’t want regular Coke with all its calories), the ponytailed 16-year-old behind the counter asks if you want a receipt. After you fill your tank, the pump asks: “Receipt? Yes or No.” Ditto for your ATM.
Someone, somewhere has wondered, “How much do we spend on these rolls of receipt tape?”
The point is no expense is too small to measure. There is an old adage that says, “You get what you measure.” It may be a cliché, but at its core it is quite profound. “What should you measure?” you ask. Answer: Everything.
Most business people start with the profit and loss statement and too many people end there, neglecting completely, or at best, minimizing their scrutiny of their balance sheet. It should be the other way around. Your balance sheet is where your net worth resides.
The most basic balance sheet metric is the current ratio — current assets divided by current liabilities. It should calculate to at least 2-to-1. Receivable days outstanding and inventory turns are the most common assets measured. While the total days outstanding are important metrics, they should also be measured on a customer-by-customer basis. Keep track of what percentage of your sales and receivables are with your largest customer. Your personal risk tolerance will determine what this figure should be. More than 5% should start you thinking. Consider incentiv-izing your collection department based on reducing the amount and percentage of past-due accounts.
Inventory turns in the aggregate should only be the starting point. A truer measure of your purchasing effectiveness is turns by product or at least by product group. Base your purchasing peoples’ bonuses on inventory turns offset by the number of stock-outs.
Your mix of business will determine receivable days outstanding and inventory turns. The extent to which you have to dip into your bank line is a good gauge of how you are managing these assets.
Speaking of bank lines, be sure to pay close attention to any covenants. One that is pretty standard is the ratio of total liabilities to net worth. Liabilities should be less than net worth. Otherwise your bank and other creditors have more claim on your business than you do.
So far we’ve only discussed the balance sheet. Now let’