J411 // MIDWAY / ASSESSING & MAXIMIZING YOUR COMPANY PERFORMANCE

SOME KEY IDEASBy 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 MIDPOINTMETRICDEFINITIONTOO HIGHTOO LOWRANGE

CURRENT RATIOCA/CLUNPRODUCTIVE ASSETSLIQUIDITY PROBLEMS2.0 2.5

LEVERAGEASSETS/EQUITYCOSTLY & RISKY FINANCINGLOW RETURN ON EQUITY1.75-2.75

SALES TO CURRENT ASSETSSALES/CASTOCKOUTS OR CASH OUTSLOW ASSET TURNOVER3 5x

CONTRIBUTION MARGIN1 VC/SALESUNCOMPETITIVE PRICINGCASH FLOW PROBLEMS30 50%

RETURN ON SALESNI/SALESPOOR QUALITYCASH FLOW COVERAGE5% - 15%

ASSET TURNOVERSALES/ASSETSSTOCKOUTS OR CASHOUTSPOOR RETURN ON INVESTMENT1-1.75x

ROETAT x ROS x LEVERAGEABOVE OUT OF RANGEABOVE OUT OF RANGE10%-20%

PLANT UTILIZATIONPRODUCTION/CAPACITYEMPLOYEE TURNOVERIDLE ASSETS150%-175%

SALES TO INVENTORYSALES/INVENTORYSTOCKOUTSCASH OUTS8 - 12x

SALES TO CASHSALES/CASHBIG AL!READ ON 18-22x

TASKGo 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. Assets = Liabilities + Equity ii. Net Working Capital = Current Assets - Current Liabilitiesiii. Current Assets = Cash + Accounts Receivable + Inventory + Marketable SecuritiesThus (with a little algebra): iv. Current Assets = Current Liabilities + Net Working CapitalPutting (i) and (iv) together, its easy to see that: NET WORKING CAPITAL IS EQUITYAnd, by (iii):CASH IS BEING FUNDED WITH DEBT OR EQUITYThe 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: USE THE FIRMS CASH TO CREATE WEALTH PAY THE CASH OUT TO THE SHAREHOLDERS AND LET THEM MAKE THEIR OWN INVESTMENTSTo do otherwise is to risk losing your job!

SPINNING OFF EXCESS CASHIn 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.