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profitable customer. If you can retain 90 per cent of your
worthwhile customers for an average of ten years you will far
outperform your competition in terms of profitability.)

n Are we serving customers who cost more to service that they
deliver in profits?

n How do we offload such customers without damaging our
reputation?

n How do we challenge our people to achieve more using less
resources?

The balance sheet and some important ratios

The balance sheet is usually described as a “snapshot” of the company
taken at a single point in time that is true only for the brief moment at
which it is taken. Even that modest assertion is claiming a little too much
– a balance sheet often gives a very inaccurate indication of the current
market value of fixed assets. It is a somewhat loose statement of what the
company owns, what it owes and what would be left for the owners if what
it owns were to be sold and what it owes was paid off out of the proceeds.
It also allows us to answer some key questions by using ratios. (For
detailed information the interested reader may wish to read Key Manage-
ment Ratios by Ciaran Walsh.)

n Can the company survive in the short term? (If the current ratio,
current assets divided by current liabilities, comes to one or more
you know that the company could, if it had to, pay its way for the
present. The quick ratio, current assets less stocks divided by
current liabilities is often useful because although stocks are
assets, not all stocks are of value. In some companies there is an
accumulation of obsolete and unsaleable bits and pieces that may
look good on the balance sheet, but which serve no useful purpose
beyond that.)

n Are we moving our stocks quickly enough? (Stock turnover ratio,
sales divided by stocks, is a useful measure of the activity or
otherwise of a business. As a general rule of thumb, the lower the
stock turnover ratio the higher the profit needs to be to deliver an
adequate return on investment, for example the margin on daily
papers can be low as a percentage of cost, but the percentage profit
on high quality jewellery is always going to be several times the
actual cost of the materials and labour.)

n Are we getting in our money efficiently? (Average collection period:
Debtors divided by Sales per Day, shows how effective you are at
getting what is owed to you. The skilled finance manager delights
in screwing down the average collection period while

Knowing the numbers 135