Dr Graham Godbee shares with us three powerful analytical tools. To download the complete article as a 11 page PDF, please click here.
DU PONT ANALYSIS
Du Pont Analysis is the basis of most consultants’ analytical frameworks. It maps out (and puts numbers on) all the components that make up the key ratio in most businesses: Return on Investment (ROI).
It allows us to see what changes need to be made to achieve a desired return. Alternatively, it can highlight where the key problems are for achieving good returns. We can then focus on addressing these problems.
SUSTAINABLE GROWTH RATE
Sustainable Growth Rate is a quick and neat calculation to see if we are growing within our means. Given our levels of profitability, dividends paid out, assets required and debt levels, how fast can we grow our sales without running into financial difficulty.
While we are usually keen to grow sales, too much growth puts strains on our ability to fund it. This is known as overtrading and is one of the key causes of business failure.
Profitable companies go bust: it is cash flow that pays the bills, not profit.
The professional manager needs to balance profits, growth and viability.
This applies to all companies and projects: big and small.
Before we launch a new product or enter a new market or put in some new equipment, the key question is what level of activity do we need to achieve to cover our costs: i.e. break-even.
There have been many projects launched which need 300% market share to break-even! The Excel spreadsheet even allows you to calculate the break even for your entire business, even if it has multiple products or services. You just need to input the sales mix into the spreadsheet.
The tools are a handy first approximation of analysis for your business. Naturally, there should be some fine tuning to be more exact. As well, you then need to understand the analysis and what to do about it.
Even so, you will gain some interesting insight into your business from these tools and their spreadsheets.
To download the complete 11 page article as a PDF, please click here.
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