Back to the Basics
Posted August 1st, 2008 by admin
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A seemingly simple answer that many MBA's cannot answer is how does your company make money? There are even CFO's, VP's, and CEO's that struggle to answer it. This is a simple question to test your business prowess.
The are five basic fundamentals of moneymaking. They are cash, margin, velocity, return and growth. Any shrewd business leader should have a strong understanding of these basics to make their business work.
On the surface, it would appear easy to understand what these basics are, but more difficult would be the implementation of them. Being a smart business man it not always about knowing the meaning of things but rather keeping the essentials of moneymaking in its simplest terms: companies must make money in order to survive. A good example of this is how the company operates. A mailroom clerk should realize that providing the check to the accounts receivable department on time will help with the companies cash flow just as a sales representative knows that higher margin products will increase company returns.
No business can survive without CASH. Very simply, you should know how much cash your business is bringing in and how much is going out. What is your company doing that gets the cash in the door and can you do it better and more efficiently. Likewise, how much cash is your business consuming and are their ways to lower costs.
MARGIN is the money a company earns after all expenses are counted for, but do not forget about gross margin as well. Gross margin is the difference between a products selling price and the cost to make that product. An key component is being able to realize the changes inside or outside the business that affect this margin. Their might be a new competitor who is doing it better, cheaper and more efficiently than you.
VELOCITY is just as the name suggests, referring to speed and movement. Say your company has three million dollars in inventory for the year and the revenues are thirty million. Your inventory velocity is 30. This is the indicator by which you can tell how fast your materials are moving through the factory and turning them into finished products. In business, typically the faster the better.
Your RETURN is based on the margin multiplied by the velocity. It is not a good sign if the return is lower than the cost of capital. This also causes shareholders to offer a concerned glance. To bolster your return, boost your margin or increase your velocity. If you can do both, all the better.
Most businesses need to GROW to stay in business. The ability to adapt and keep up with technology is an integral part of this success. Staying ahead of the learning curve requires time and money, and if you are not able to properly budget than that may stump your growth.
You should never overlook the value that lies within these basics. It could never hurt you to go back and reevaluate them and see how they can work for you. You can also ask your employees or coworkers what they know about these basics and see if they have the necessary acumen to help your business grow. Every little bit helps, and understanding these methods may make the difference in whether you sink or swim.
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