Utah State

Section 1

Step 3. Internal Analysis

Downloads and Links

Where's The Beef?

ROC Spreadsheet (Excel)

 

Inventory

Inventory Spreadsheet (Excel)

 

Accounts Receivable

A/R Spreadsheet (Excel)

 

Pulling It All Together

Watch this video after completing all of the assignments in this Step.

 

The Business Cycle

(Quicktime Video)

Return on Cost (ROC)

ROC is a little calculation I use for cash turnarounds. It's similar to Return on Investment (ROI) but it's easier to do in your head and means more in a cashflow situation.

 You have cut spending to the bone. You have found a little more cash. Maybe you can keep your head above water long enough to start swimming. You are going to start doing so many ROC calculations it will become second nature. You will soon be able to do them in your head and you will be doing them in your sleep.

 Everything you do in your business should be analyzed based on ROC. Basically, here's how it works. Return ÷ Cost = a percentage.

 In ROI return is defined as profit from the activity. Remember, right now, we don't care about profit only cash. So, analyze every activity based on the cash brought in divided by the cash you spent.

 Assignment: Use the ROC Spreadsheet in the right hand column to analyze products, services and expenses based on ROC.

 Once you know where you are getting the most return, concentrate on those areas and eliminate any mediocre performers and the losers.

Inventory

If your company has no inventory then look at selling equipment or supplies you aren't using. If you do carry inventory for resale, this is the easiest and quickest source of cash you will find in your business.

 There are a couple of calculations you need to do to see where you are at. You can find them in the spreadsheet in the right hand column.

 Average inventory is just that. We calculate it so we can do the other calculations. As with any average you divide the sum by the number of components. We are going to use the quick and dirty method. Beginning Inventory plus Ending Inventory divided by 2. Is it very accurate? No. You can get more accuracy by adding Beginning Inventory to Ending Inventory for each month and dividing by 13. You can even add Beginning Inventory to Ending Inventory for each day and divide by 366. That would be very accurate but, if you're taking this course you don't have that kind of information or time so just go quick and dirty.

 Inventory turnover tells us how many times per year, your inventory turns over. In other words, how many times per year you buy inventory, sell it and replace it.

 Days inventory tells us how many days, on average, your inventory sits on the shelf.

 Assignment: Use the Inventory Spreadsheet to the right and calculate your Average Inventory, Inventory Turnover, and Days in Inventory.

Accounts Receivable (A/R)

If your company has the necessity to carry Accounts Receivable for clients, this is the second easiest area to gain cash. A/R should only be carried as a last resort to get business in the first place. You don't want to finance someone else's business but that exactly what you do when you allow them to charge on A/R.

 Part 1. Close all A/R accounts except for the clients who pay the fastest. It doesn't matter if you have to close your biggest client. If you don't close them and their account is past due, their A/R will close you.

 Part 2. Go get your money. Call the accounts and tell them that you are closing their A/R and their account is due and payable.

 As director of a collection agency "back in the day", I learned the collection rates on aged A/R were; 30 days about 95% collectable, 60 days about 65%, 90 days about 25% and 120 days or more were nearly worthless. So if at all possible don't carry A/R. You are only financing someone else's business. If you do have to carry some A/R here is how you do the analysis.

 Average A/R is just that. We calculate it so we can do the other calculations. As with any average you divide the sum by the number of components. We are going to use the quick and dirty method. Beginning A/R plus Ending A/R divided by 2. Is it very accurate? No. You can get more accuracy by adding Beginning A/R to Ending A/R for each month and dividing by 13. You can even add Beginning A/R to Ending A/R for each day and divide by 366. That would be very accurate but, if you're taking this course you don't have that kind of information or time so just go quick and dirty.

 A/R turnover tells us how many times per year, your A/R turns over. In other words, how many times per year you sell something on A/R and then get paid for it.

 Days A/R tells us how many days, on average, it takes to collect your accounts receivable.

 Assignment: Use the Accounts Receivable Spreadsheet to the right and calculate your Average A/R, A/R Turnover, and Days A/R.

 Assignment: Send all of the previous assignments to your counselor for analysis and suggestions and proceed to the next Step.