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J411 // MIDWAY / ASSESSING & MAXIMIZING YOUR COMPANY PERFORMANCE

SOME KEY IDEAS


By now, most companies have mastered the basics of the sensor industry, determined the
space in which theyd like to compete, and have established a solid base of viability. Now is
a good time to fine tune performance measures and begin thinking about the creation of
wealth, not just survival to the next round.
This detailer will deal with two basic issues that usually crop up around the midpoint of the
simulation:

What are some metrics that help us gauge our company health?
What do we do with excess liquidity that begins to build up from this point
forward?

SIGNS OF HEALTH: KEY METRICS AT THE MIDPOINT


METRIC
CURRENT
RATIO

DEFINITION

LEVERAGE

ASSETS/EQUITY

SALES TO
CURRENT
ASSETS
CONTRIBUTION
MARGIN
RETURN ON
SALES
ASSET
TURNOVER

TOO HIGH

TOO LOW

UNPRODUCTIVE
ASSETS
COSTLY & RISKY
FINANCING

LIQUIDITY
PROBLEMS
LOW RETURN ON
EQUITY

SALES/CA

STOCKOUTS OR
CASH OUTS

LOW ASSET
TURNOVER

1 VC/SALES

UNCOMPETITIVE
PRICING

NI/SALES

POOR QUALITY

CASH FLOW
PROBLEMS
CASH FLOW
COVERAGE
POOR RETURN
ON INVESTMENT
ABOVE OUT OF
RANGE

CA/CL

ROE

TAT x ROS x LEVERAGE

PLANT
UTILIZATION
SALES TO
INVENTORY
SALES TO CASH

PRODUCTION/CAPACIT
Y

STOCKOUTS OR
CASHOUTS
ABOVE OUT OF
RANGE
EMPLOYEE
TURNOVER

SALES/INVENTORY
SALES/CASH

SALES/ASSETS

RANGE
2.0 2.5
1.75-2.75
3 5x
30 50%
5% - 15%
1-1.75x
10%-20%

IDLE ASSETS

150%-175%

STOCKOUTS

CASH OUTS

8 - 12x

BIG AL!

READ ON

18-22x

TASK
Go to a page 3 of the Capstone Courier and copy and paste the entire page onto an Excel
worksheet. You can then use the data to quickly calculate each of the above measures (with
the exception of Capacity Utilization which is on page 4) for (this is important!) both your
company and your competitors.

MORE ON CASH
Note the last measure: the Ratio of Sales to Cash. The reciprocal of that would be
Cash/Sales. If the correct range of Sales to Cash is 18 22x this implies:

4.5% < Ratio of Cash to Sales < 5.5%


Most people would ask, Can you really have too much cash? While there are exceptions
for instance during an economic downturn or when the firm is saving funds for upcoming
investments the answer is a resounding yes!
Heres my reasoning. By definition,

i.
ii.
iii.

Assets = Liabilities + Equity


Net Working Capital = Current Assets - Current Liabilities
Current Assets = Cash + Accounts Receivable + Inventory + Marketable
Securities

Thus (with a little algebra):

iv.

Current Assets = Current Liabilities + Net Working Capital

Putting (i) and (iv) together, its easy to see that:

NET WORKING CAPITAL IS EQUITY


And, by (iii):

CASH IS BEING FUNDED WITH DEBT OR EQUITY


The firm, of course, needs cash to conduct business. But Cash has no return and is being
funded, at least in part, by very high cost Equity financing. In plain English:

The firms cash belongs to the shareholders


The shareholders are taking the risks of the business
The shareholders expect a return for the risks they are taking
Thus, the firms managers need to either:
o USE THE FIRMS CASH TO CREATE WEALTH
o PAY THE CASH OUT TO THE SHAREHOLDERS AND LET THEM MAKE
THEIR OWN INVESTMENTS

To do otherwise is to risk losing your job!

PAY (OR INCREASE) DIVIDENDS


But do so slowly ... don't build expectations you can't match
BUY BACK STOCK
Especially in a year where competitors mistakes produce
outsize profits
REDEEM DEBT
But note that this reduces your leverage which reduces ROE
INVEST IN CAPACITY
Be careful to plan capacity so you don't have a "yo-yo" efect
INVEST IN AUTOMATION
Especially in the Low End and Traditional Segments
MAINTAIN MAXIMUM AWARENESS & ACCESSIBILITY
But, again, note that you can overspend here as well
FULLY FUND TQM & HR INITIATIVES
But be careful to not OVERSPEND

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In the world of business, firms with excess cash tend to either 1) acquire other firms or 2)
become acquisition targets (usually resulting in removal of the existing management team!).
Neither of those options is available in this situation. Thus, assuming the company has a
sufficient number of well positioned products (if not, go back to R&D!); companies with cash
in excess of 5.5% of Sales should consider the following management decisions, in order of
desirability.

SPINNING OFF EXCESS CASH