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How to analyze the financial performance of a company in a flash?

An entrepreneur wants to know the financial health of customer/suppliers in order to make informed business decisions. A manager in turn needs financial metrics to direct his team better while an investor makes it an important criterion for his investment decisions.

Financial performance analysis entails a full diagnosis of the profitability and financial soundness of a business. Basically, it involves analyzing company data available in the three financial statements – the Balance sheet, the Profit & Loss Account and the Cash-flow statement.

Turn data insights into actions  

Data from these financial statements are compiled by cloud-based company data providers in a user-friendly format. By leveraging these data, you can analyze the financial performance of a company.

Broadly, there are four categories of financial ratios to look at:

Liquidity ratio

It measures the extent of liquidity a company has to meet its debt obligations.

One of the popular measures is the current ratio – which is calculated by dividing current assets by current liabilities. The higher the ratio, the better is the company’s liquidity.

A ratio of one or more is generally acceptable; it however varies across industries. A lower current ratio than the industry average could mean you might want to review your credit/collections policies. Too high a ratio also pinpoints underutilized capital.

Solvency ratios

Solvency ratios give a peep into the long-term solvency of the company. The debt-to-equity ratio is calculated by adding all of the company’s liabilities and dividing it by shareholder’s equity.

Lower the debt-to-equity ratio better is the company’s financial health. A low ratio also gives the company the elbowroom to borrow more, if need be, to fund its growth path.

On the other hand, a company with a debt-equity ratio of more than two is considered riskier. Again, this ratio needs to be analyzed from an industrial perspective.

One challenge with only reviewing company debt is that they do not tell you anything about the company’s ability to service it. This is exactly what the interest coverage ratio aims to fix. It is calculated by dividing earnings before interest and taxes by the company’s interest expense. The higher the ratio, the more poised it is to repay its debts while a ratio below one indicates a precarious financial position.

Efficiency ratios

It measures the company’s ability to use its assets to generate income. The inventory turnover ratio indicates how long it takes for inventory to be sold and replaced during the year. The longer the stock sits on company shelves, the more are its costs.

It is calculated by dividing the cost of goods sold by the average inventory for a period. Similarly, account receivable turnover tells how often it is collected and paid.

Accounts payable turnover: Measures how fast you pay off your creditors

Total asset turnover: Showcases how well you use your assets to generate revenue

Profitability ratios

Popular profitability ratios are

Net profit margin – How much a company earns after taxes relative to its sales? A company with a higher net profit margin than its peers is usually more efficient and dynamic.

Operating profit margin – How efficiently a company generates profit from its core operations before paying its interest and taxes?

Return on Equity indicates how much are shareholders earning on their investments. It is calculated by dividing Profit After Tax by the shareholder’s equity.

Return on Assets (ROA) specifies how well the management is utilizing the company’s resources or assets. Capital-intensive industries usually tend to have low ROA than the service industry. It is calculated by dividing net profit by average total assets.

There are many more financial ratios for making advanced analysis. All need not be looked at in isolation but analyzed in conjunction to get a big picture. Time-series analysis and comparison vis-à-vis industrial benchmarks in turn could help gain deep financial insights.

 

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates

 

 

Migrating from Internet Explorer to Edge, Chrome or Firefox

Microsoft has retired Internet Explorer and will go out of support on June 15, 2022. Click here to read more from Microsoft on this. Continuing to use a browser not supported will result in serious security risks and vulnerabilities. Click here to read more on what Microsoft says. Considering this it is advisable to migrate to other new browsers like Microsoft Edge, Google Chrome or Mozilla Firefox.

If you are working in an organisation like Bank, Large Corporates etc., browser installations will be mostly managed by the internal technical support team. In such cases, please raise a ticket requesting your technical support team to install Microsoft Edge, Google Chrome or  Mozilla. Kindly note you can have more than one browser on your PC if you want.

 

Please find below steps to download and install browsers on your own if you have the rights to install browsers.

I. Steps to Download and Install Microsoft Edge:

In most computers Microsoft Edge will be built-in by default. Meaning you dont have to separately download and install them. To check if you have Microsoft Edge Installed or not, Open your start menu and search for Microsoft Edge. If install you will see search result like in below screenshot. You can click on “Open” to open and start using Microsoft Edge.

If Microsoft Edge is not installed, please follow below steps to install Microsoft Edge..

  1. Open your current Internet browser and go to the Microsoft Edge download page.
  2. Click the Download button, depending on your version of Windows.
  3. Follow the on-screen instructions to install Microsoft Edge.

II. Steps to Download and Install Google Chrome:

  1. Open your current Internet browser and go to the Google Chrome download page.
  2. Click on Download Chrome Button to download latest version of Google Chrome.
  3. Follow the on-screen instructions to install Google Chrome.

III. Steps to Download and Install  Mozilla Firefox:

  1. Open your current Internet browser and go to the Mozilla Firefox download page.
  2. Click on Download Firefox button to download latest version of Mozilla Firefox.
  3. Follow the on-screen instructions to install Mozilla Firefox.

 

 

 

How to build a world-class credit management system for your business?

Credit makes the world go around. Without this life blood of the economic system, many businesses would cease to exist.

If a company makes a sale on credit, only when the cash is collected that the sale is considered to be final and complete.

Credit department plays an important role in managing the cash conversion cycle of companies. If the sales department is the engine of a company, then credit department are its gears and oil that make the engine work.

Here are some credit practices to stay ahead of the curve:

Detailed credit policy

Does your business have a well-articulated goal for its credit department? Is it quantifiable and measurable? For instance, reducing DSO (Days Sales Outstanding) from 100 days to below 60 days is more definitive and clear than a mere generic statement of maintaining healthy portfolio of accounts receivables.

Furthermore, who takes credit responsibilities? Some companies link the bonuses of sales departments to collectability of accounts receivables to ensure sales executives are more mindful while soliciting customers. Some others put the onus of collections on the credit manager while also empowering them solely with assessment and approval of customers.

Are there credit limits and sign-off levels throughout the organization as part of risk-mitigation measures? For instance, sign-off level could be something like this:

Credit analyst – upto Rs 50 lakh of deal value

CFO – Rs 1 cr

President – Rs 5 cr

Board of Directors – Rs 10 cr and above

By having more senior employees involved in big deals, corporate can guard against potential risks and downsides.

Actively monitor customers and competitors

Recently, a south-based textile company was losing customers in certain geography. Their research found that it was losing to a single competitor which was matching its price but also giving abnormally long credit to its customers. Financial analysis of the competitor company found it to be in a precarious financial state and that it was using these desperate measures (like liberal credit) only to stay afloat. Armed with this information, the company stayed put with its pricing and as expected the competitor later filed for bankruptcy.

Cloud-based databases often give deep and critical financial information about customers, competitors as well as industry. By leveraging such data, credit managers can easily assess their credit worthiness and make informed business decisions.

In fact, many companies internally rate their existing customers based on their payment history and financial strength. By red-flagging those with a history of late payments, legal issues and bankruptcy, they reduce potential bad debts.

Organizational Buy-in

Any business credit policy needs a buy-in across the organization (including that of sales department) for it to be successful. Are the credit goals in sync with the larger goals of the organization? For instance, the company strategy might be to boost market shares. That in turn could require going down the quality curve and hunting for some difficult customers as well.

Are the credit terms flexible enough to reach out to them with ample safeguards in place? For instance, in this case, a corresponding credit term structure might insist on full prepayment for riskier customers as against the usual Net 30 days (of credit).

Clear communication of terms and payment conditions

Send invoices as soon as the orders are fulfilled and addressed to the right person. Email invoices rather than just sending it by post and ensure it is received by them by making courtesy calls. Make payments easier by accepting different forms of payment and by clearly stating out bank details.

If there are discounts for early payment, clearly spell it out. Some software facilitates automation of the entire follow-up process.

Takeaway

By leveraging online company data services, you can get more insight into customers and industry credit practices. Capitalize on it to keep credit risk under control.

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates

 

What a data-driven sales strategy can do for your business?

Successful sales professionals tend to depend on their gut feel and natural charisma to gain a competitive advantage. Is sales prowess by itself sufficient to predict or influence customer behaviour?

Not really. It also needs the support of data today. And lots of it.

The Covid 19 pandemic has changed the marketing landscape in many ways as sales meetings, demonstrations and events went digital over the past two years.

According to a recent Mckinsey report, about 80% of B2B decision-makers prefer the digital mode of buying and don’t want to return to the pre-COVID norm either.

 

A sales strategy that incorporates data insights is expected to give big pay-offs in these critical sales areas:

Lead generation and qualification   

Usually, cold calling has a low success rate in soliciting prospects. But if empowered with internal and external data, lead conversion rate could be higher.

Data are of two types. For starters, the operational data that comes from your internal CRM system – be it win rates, sales cycle length, average deal size, number of contact moments and so on. This is gathered while doing sales. Collecting and structuring CRM data can provide demographic and behavioural insights about customers. If used in conjunction with external company information that exists in many shapes and forms, a holistic sales strategy could be devised.

For instance, a sales manager found from an external company database that her existing client was also a director of a prospect company. By leveraging her network, she managed to get a foot in the door of the prospect company. Furthermore, she ensured the prospect passed the necessary test of financial strength and creditworthiness before signing the deal.

Many companies have already started using lead-scoring algorithms based on detailed and granular data sets of their prospects in an area.

Talent management

Data analysis can give insights into human traits that make winners. Integrating sales performance with other information such as HR data and customer profile can help identify talent that is high-performing.

For instance, a leading construction equipment company found its market share dipping in specific districts. Data analysis showed that sales staff with civil engineering degrees had a better success rate in these areas – especially with large clients. It used the insight to focus more on technical training for its existing workforce while also hiring more civil engineers for the region.

Maximize customer value

A data-driven strategy enables offering a more personalized sales experience. For instance, using CRM you can figure out what is the likelihood of your customer buying another product of your company. For instance, a sales manager in a bank might find that a high credit card bill outstanding has a strong correlation with taking a personal loan. This in turn could help cross-sell products to existing clients.

There is a popular sales maxim – it costs 5X more to acquire a new customer than it costs to keep a current one. A good data analysis helps predict the likelihood of customer churn and take action beforehand.

How to get started?

Capitalize on internal data resources from your website and CRM platforms. Resort to data cleaning and enrich your database with external data points from specialized company data providers. Use low-cost solutions that are ready to deploy from the cloud to get started. Once you start witnessing the benefits of data analytics, invest further in data infrastructure. Sometimes, external databases need to be seamlessly integrated with existing CRM platforms for it to be valuable to the sales force and at the right time.

Takeaway

The ability to predict and influence customer behaviour requires more than just sales prowess. It requires loads of authentic data – internal as well as external. Leveraging it in turn can give you huge pay-offs in the long run.

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates

 

 

 

Are you choosing suppliers for your business the right way?

Running a background check on prospective employees by the company HR is well-known. What about your suppliers? Vendors in many ways are an extension of your organization helping you manage work processes and assure delivery. By doing a thorough screening of suppliers, you can prevent loss of reputation or fines and lawsuits.

How do we short-list them?

Background check

Some suppliers are recommended by their existing users while others could be known from the approved list of trade associations or Government.

While embarking on a new business relationship, conduct a thorough background check. Is the supplier a legal business entity with proper licenses to perform work? Have there been any pending lawsuits or criminal convictions? Some companies shut down due to negligence or bankruptcy and reopen under a new name.

Cloud-based databases today make it possible to do such background checks of prospective suppliers remotely by downloading related reports and data.

Price

Affordable pricing by suppliers could ultimately give a good value proposition to end customers. While competitively priced suppliers are welcome, ensure they don’t compromise on quality or service standards. Any sloppy work on the supplier part can result in incurring extra costs in the form of replacement or loss of business/reputation.

As a thumb rule, diversify your bets. What if a single supplier goes out of business or becomes complacent and lowers their delivery standard?

Reliability

Faulty products or late deliveries are bound to let your customers down. Can suppliers deliver consistently on quality and at the right time? How long has it been in the business and what is its reputation? Large suppliers with a good business track record are generally reliable as they have resources and systems in place to manage contingencies. However, don’t ignore small vendors who are ‘flexible’. In their quest to succeed amidst intense competition, some are willing to take extra efforts by responding better to different requests such as rush orders or stock replacement.

An FMCG company, for instance, might be introducing a new product or doubling production to cater to increasing demand. Does the supplier have the flexibility to quickly adapt to changing business dynamics as well as emergencies?

Service Level Agreements are often built into supplier contracts where service standards, the timetable for delivery, legal and regulatory compliances and payment terms are set out. Not least, confidentiality and non-disclosure provisions, the dispute resolving mechanism as well as termination conditions.

Financial strength

Align with financially strong suppliers who could withstand business vagaries. In times of pandemic, supply chains of many companies were disrupted as their vendors went out of business. A robust balance sheet, as well as financials across multiple business cycles, would indicate that the supplier is able to withstand downturns. Check the supplier’s credit history to get a glimpse.

Location

While technology-driven businesses need not be limited by locational constraints, others can keep supply chains local to reduce business risks. It has the potential to reduce supply chain costs, improve flexibility and contribute to the local economy. However, don’t ignore distant suppliers that are best in delivery and service.   In overseas sourcing, communication standards (including language barriers), as well as country-related risks, need to be well-understood.

Corporate ethics

Your business practices would be judged on the labour and environmental practices of your suppliers. So, if a construction company is hiring a contractor who in turn is violating labour standards prescribed by Company law, then it would be legally binding. So, while hiring a supplier, ensure their business value aligns with that of yours. Whenever possible meet them in person and check how their businesses operate.

Takeaway

Your supplier can make or break your business. Do thorough background checks to ensure they pass your standards of reliability, affordability and trustworthiness.

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
  • Our Customers have found value in using Probe42.in to enable their decisions involving Identifying prospects, sales preparation, credit and competitor analysis, etc.
  • The Probe42 platform has been extensively used by Banks and Corporates