Managing by numbers

Five years ago, I attended one of my first local EO learning events in Montreal. It was a speaker who demonstrated to us the power of managing a company by simple key metrics put in a simple format.

I forget who the speaker was and I was only able to jot down a couple of the formulas he used at that time. I was, however, sensitized enough to start building my own simple financial dashboard. This is my tool of choice when when I audit the financial part of a corporate strategy.

Presentation format :
- Magic number : Formula to get the number
o Suggested acceptable range of the magic number (subjective according to your situation, but most are based on industry best practices)

1. Liquidity ratios : ability to pay bills and availability of liquidity for new activity
- Current ratio : Current Assets / Current Liabilities
o 2 : 1

- Acid Test Ratio : (Cash + Accounts Receivable) / Current Liabilities
o 1 : 1

- Debt/Equity Ratio : Total Liabilities / Owners (Stock) Equity
o Lower than 2:1

- Times Interest Earned : Net income before Interest & Taxes / Interest Expense
o 5:1


2. Efficiency ratios : ability to deliver optimized internal process efficiencies  -Net Income ratio : Net Income / Sales
o More than 10 cents on the dollar

- Gross margin ratio : Gross Margin / Sales
o Gross margin = Sales – Cost of sales

- Asset Turnover Rate : Sales / Total Assets

- Accounts Receivable Turnover : Sales / Average Accounts Receivable
o Lower than 60 days

- Number of Days Sales in Receivables : Average Accounts Receivable / (Annual Sales / 360)
o Any number above 30 indicates past due accounts

- Inventory Turnover : Cost of Sales / Average Inventory
o 25 c for each 1$ held in inventory


3. Equity Ratios : ability to deliver optimized shareholder and stakeholder value
-          Return on assets : Net Income / Total Assets
o More than 10%

- Return on equity : Net Income / Stockholders Equity

- Earnings per share : Earnings after taxes / Number of Shares Outstanding

- Price/Earnings Ratio : Price / Earnings per share

- P/E Reciprocal : Earnings per share / Price

- Total Market Cap : Number of Outstanding Shares x Market Price per Share