Archive for June, 2009

Fire Fighting versus the Strategic Planning Process

Tuesday, June 30th, 2009

One of the early steps in the strategic planning process is to assess the current state of your organization.  Through this process the ‘most urgent’ issues are identified and neutralized.  Once neutralized the organization now has time to plan a strategy to eliminate the ‘root cause’ of these most urgent problems.  These urgent issues must be dealt with first before a formal strategic planning process can be developed.  Customizing a process to eliminate the root cause may take time and you don’t want to miscalculate the cause(s) and have to back track the process later. 

Once the most urgent issues are dealt with, now you can begin to be proactive in developing a customized process to deliver your organization’s strategic goals and objectives. 

An important concept for strategic planning has to do with the owner’s ability to redirect his or her energy from ‘fire fighting’ to ‘strategic planning’.  Once the root causes are eliminated, the owner’s time spent fighting fires will be significantly reduced and this time must be filled with other value added activities.  Why would anyone want to eliminate a main portion of their daily activities without filling it with something else?  These emotions have to be dealt with within this process.  Having the owner focus on the metrics used to track the success of the strategic progress in the various areas will add value to the entire strategic planning process.

There are several very good tools used to assess your organization.  This is not a random process, it is calculated and structured using proven tools to show benchmark metrics which will be used later to assess the success of the strategic planning process. 

Let me know what you think.

Take Care

Posted in General Business, Strategic Planning | No Comments »

Does your organization fully understand your liquidity ratios?

Wednesday, June 3rd, 2009

If you have gone to a financial institution to request a loan and they declined to give you that extended line-of-credit or that new term loan, one of the determining factors they used to make their decision was most likely your company’s liquidity ratios.  Understanding them prior to talking to your lender can help you to better prepare for that discussion and hopefully help you to secure the financing you are requesting.

Owners and managers can understand how their businesses are performing by understanding these liquidity ratios;

Return on Equity Ratio (ROE)

Return on Asset Ratio (ROA)

Asset Turnover Ratio

Account Receivable Collection Period

Current Ratio

Quick Ratio (Acid Ratio)

Debt to Asset Ratio

We will look at the three ratios your banker will probably look at first; Current Ratio, Quick ratio, and Debt to Asset Ratio.

Your Current Ratio is calculated by dividing your current assets found on your balance sheet by your current liabilities, also found on your balance sheet.  This ratio is often expected to be a 2 to 1 ratio, assets to liabilities.

  Your Quick Ratio (also known as your Acid Ratio) is calculated by dividing your current assets minus your inventory by your current liabilities found on your balance sheet.  This ratio if often expected to be a 1 to 1 ratio, assets minus inventory to liabilities. 

Your Debt to Asset Ratio is calculated by dividing your total liabilities found on your balance sheet by your total assets, also found on your balance sheet.  This ratio may be depended on your industry.  Here is why you need industry benchmarks in order to analyze what the information is telling you.

Knowing these three ratios and how your organization performs to your industry averages can greatly enhance the conversation between you and your lender.

Let me know what you think,

 

Take Care

Posted in Financial Analysis, General Business | No Comments »