|
|
|
|
Financial services begin with converting the vision and plan into financially measurable goals. This process is updated regularly by setting budgets and financial objectives for the current and subsequent years.
Once the company begins operations, a second function is organizing and reporting the historical information submitted to it by the company reporting systems. These reports include income and expense statements, balance sheets and cash flow statements.
A third function of Financial Services is to provide reports and projections of information to guide and support management’s choices for guiding the company to its vision of its leadership. These reports include the “what if” projections managers consider before committing to a path or sequence of choices.
If there were a universal statement about companies in decline, it would be that the financial records and reporting systems are in disarray and the quality of the information being reported is inaccurate or incomplete. For this reason, corporate renewal should begin with a thorough review of the existing records, assumptions, and reporting systems.
It is frequently difficult to spot meaningful trends when glancing at a set of financial statements. To make comparisons easier, financial programs convert the data into percentages of income or other basic information. Their expression depends on the distribution rules set into the accounting programs.
An additional technique for aiding analysis is to create a set of financial statements using only the percentage figures, called common size financial statements. Note how easy it is to spot trends when information is in this format.
| Period | 1 | 2 | 3 | 4 | 5 |
| Accts. Rec. | 28.2% | 28.8% | 29.3% | 30.3% | 31.1% |
| Accts. Pay. | 11.7% | 11.8% | 12.3% | 13.1% | 15.6% |
| Cost of sales | 85.9% | 86.6% | 88.4% | 91.9% | 98.1% |
There are several additional reports that are helpful with corporate renewal efforts. They include a spreadsheet that shows the effect of possible initiatives. In this report, the left column contains the current financial information and each subsequent column show how each element in the current financials changes as proposed initiatives are put in place. The final column is the summation of the proposed changes.
When a plan is agreed to, it is useful to project various time periods as the plan is put into effect in order to measure the results against the projected results. To give this report a foundation, several years of history are often shown in the initial columns.
Another valuable report divides the current and projected income and expense statements in segments representing the Input/Output Channel, the Value-Added work, and the Information and Instructions to support the Value-added work. This will give an indication of the resources devoted to each and whether there appears to be imbalances between elements of productivity.
A primary focus of a turnaround effort is value. The value of an enterprise is generally a multiple of one of the elements valued by a potential purchaser. There are as many ways to value a company as there are reasons to value it. It is important for a turnaround effort to realize that there can be a wide difference between the values established by various interests. In some cases the most aggressive valuations can be several times higher than the least value. Common approaches to valuation include:
Book Value
Tangible Book Value
Appraised Value
Excess Earnings Value
Liquidation Value
Replacement Value
Start up Value
Enterprise Value
Capitalized Revenue
Capitalized Earnings
Capitalized Pre-tax Earnings
Capitalized Cash Flow
Stock Price Capitulation
Similar Market Capitalization
Discounted Cash Flow
Leveraged Buyout Evaluation
Combination Value with another Enterprise
Comparing the ratios of various elements of the financial statement can also be used to give insight into the health of a company and the progress of a renewal effort. The most commonly watched ratios give insight into Liquidity, Efficiency, Leverage, Profitability, and Performance. Ratios are useful because they can provide a basis for comparisons to goals, needs, industry standards, and competition. They are relevant even if the size of one enterprise is so different from another that other comparisons are difficult or meaningless. Reviewing the ratios of a company gives a macro view of corporate health. Common management ratios are:
Current Ratio
Quick Ratio
Revolving line of credit vs. inventory and accounts receivable
Total debt as a % of tangible assets
Interest Coverage
Total debt service coverage
Debt vs. Equity
Accounts Receivable turnover
Days’ sales in Accounts Receivable
Inventory turnover
Days’ sales in inventory
Net sales per dollar of debt
Net sales per employee
Net sales per asset dollar
Net profit per employee (full time equivalent)
Net profit per sales dollar
Operating margin of sales dollars
Income per unit sold
In addition to these general ratios, there are innumerable measures of individual performance, such as percent of calls answered within 10 seconds (service levels) or labor expended compared to labor standards (operational efficiency). Each business and industry has operating ratios that represent goals for elements of its total business. These measures are important because of the generalization that what gets measured and reported, gets worked on.
When deciding where to focus efforts, it is helpful to consider how others are doing in similar industries by Benchmarking. Benchmarking is a practice whereby you study the results that others have achieved in similar areas and compare their results to yours. By studying superior results, you can find ways to improve your methods. Though competitors may not want to share such information, many comparisons can be made using public information. Internet sites such as Edgar and Disclosure can be rich sources of this information.
There are many other companies that may not be direct competitors but have similar functions and are willing to share information. Functions such as shipping, telemarketing, coating, etc., are common to many companies and the measure of their ratios can provide valuable insight into possible changes within the company you are working with.
The methods that achieve superior results are called the best practice. Adding the best practices of the job elements in your business is a way to remain competitive, regardless of where the best practice developed. This is just another way of learning additional information to provide information and instructions to the value-added work of a company.
|
Send mail to
CompanyWebmaster with questions or comments about this web site.
|