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June 19, 2007 > How Profitable Are You? A Business Check-Up @Your Library

How Profitable Are You? A Business Check-Up @Your Library

By Gertrude Rooshan, Business Librarian, Fremont Main Library

Whether you are a start-up company or an established business, the bottom line is profitability. To really determine whether you have succeeded or failed in your business, you'll need to do an analysis of your own company compared to others who are engaged in the same or similar lines of work. The national average of sole proprietorships profitability by industry can be checked at www.bizstats.com. The measure of your own success is your company's comparison to the whole industry or to another segment of the industry, along with your financial performance from year to year. You can best check this using something called "key business ratios," which we talk about at the end of this article.

How do you become profitable?

First, you do the basics:
* Become a persuasive leader
* Treat your employees as your most important asset
* Finance your business so that your balance sheet's debt-to-equity ratio is such that you can seek debt financing if you need to, and you are not jeopardizing your company's survival
* Build a customer base

After that, there are still some important steps you need to take:

Have a solid strategic business plan
Both startups and established businesses need a long-range strategy for their business. The best way to start is to study a plan of another business in your own industry. You can find full text copies of annual reports showing such plans at www.aclibrary.org> Business and Investments>Company Information> Free Annual Reports. You can also find a number of books on business planning, such as "Anatomy of a Business Plan" and many others at our library. Go to www.aclibrary.org and click on the catalog link. Use the drop down box to change the search from title to subject and type in business planning.

Improve your marketing knowledge
The success of any business is knowledge of the market for the effective selling and promoting of the product or service. Small business managers have to understand and develop marketing programs for their products and services. To build a growing body of satisfied customers means to identify, satisfy, and service the customer's needs.
* Identify customer groups which you can serve better than a competitor
* Tailor your products, pricing, distribution, promotional efforts and services towards this specific group
* Focus on the market you can serve best by addressing customer needs which are not currently met in the market place and which represent potential size and profitability.

Use tools like the Census 2000 (www.census.gov) and American Factfinder (http://factfinder.census.gov ) to find demographics which will give you facts about the population, housing, educational, income levels, ethnic and economic make-up of your target area. Use the Economic Census to get profiles of the US economy every 5 years industry by industry. The latest one was done in 2002 and can be found at http://www.census.gov/econ/census02/. Here, you can get industry statistics of all kinds, including sales, operating expenses, and more.

Grow your business through marketing research
Expanding businesses almost always require a larger market and a steadily increasing customer base - which does not always lead to more profitability. Find ever increasing customers, deliver a product with unique characteristics and satisfy increased demand. The following is a list of some of the most useful books we have in the library for doing this:

* Identify spending potential in your area through the Community Sourcebook of Zip Code Demographics. This book contains demographic data, the number of businesses in an area by zip code.
* Identify who your customer is by county and metropolitan area: hobbies, spending patterns, high tech habits, and investment knowledge through the Lifestyle Market Handbook.
* The Survey of Buying Power gives retail sales by area in certain merchandising lines, and the hottest cities for selling.
* Projections 2007 gives forecasts for the San Francisco Bay Area to the year 2035: population, households, jobs, labor force, and income by the Association of Bay Area Governments (ABAG).
* California Retail Survey gives you surveys and statistics on the retail trade in California.

Can you market your product to this audience, in this area?
Industry surveys bring valuable information about the product line you are carrying. Study industry trends in Value Line, S& P Outlook, S&P Industry Surveys and the Business & Company Resource Center online. (This last is a subscription database you can use from work or home with your library card). These sources cover the state of each industry, trends, outlook, and market share.

Do some benchmarking
What is the competition? Identify individual firms in your area who are doing the same kind of business. How many are there in your neighborhood, how large are they (number of employees), how profitable are they (estimated sales)? These are your competitors. What do they do different from you to make them successful? Use Reference USA, another database the library subscribes to which you can use from home or work with your library card. With this database, you can tailor your query by industry code, location, number of employees, sales or any combination of these. Articles on companies, industries are also available under Articles and Databases> InfotracOneFile and the Business & Company Resource Center.

Profit Planning
The tool for profit planning is the budget. The long term plan (strategic plan) sets goals for sales growth and profitability over a period of 3 - 5 years. The budget is the short term plan and sets goals for one year. Look at your Balance Sheet. If you do not have one, set one up. Your Balance Sheet will tell you exactly how profitable you are from year to year, whether you meet the industry profitability standard or whether you are above or below the norm. The tools you can use are the D&B Industry Norms and Key Business Ratios and the RMA Annual Statement Studies.

Measures of Profitability
How are "Key Business Ratios" used? Let us take an example from Dun & Bradstreet's
"Industry Norms and Key Business Ratios" for illustration purposes. The call number is 338.0973 Industry, located in General Business Reference.

Dun and Bradstreet is the leading source of business information with a global database of 100 million company records. D& B is also in the consulting business and runs special profiles for corporations for decision making purposes. Industry Norms and Key Business Ratios is published annually; it analyzes some 800 lines of businesses, arranged by SIC (Standard Industrial Classification) code. The Library keeps a backfile of these annuals for research purposes.

Since this book is arranged by SIC codes, perhaps a little explanation of these is in order. (Experienced readers can skip this paragraph.) The SIC codes are published in the Standard Industrial Classification Manual by the Office of Management and Budget. The SIC codes are a statistical classification of all establishments. They define establishments by the type of activity in which they are primarily engaged, in order to make comparisons easier and to define industries in accordance with the composition and structure of the economy. The SIC code is a four digit code. The manual has with an alphabetical index in the back of the book. To use it, you need to go to the main entry and determine whether a certain activity by an industry is covered under that code. The NAICS or North American Industry Classification System is a 6 digit code, which revises the original codes of the U.S. Canada and Mexico. This revision was meant to facilitate comparability with trading partners since the NAFTA (North American Free Trade Agreement), to group like industries by the same activity, and to expand the code to allow for high-tech establishments and the growing service sector.

Both the SIC Code and the NAICS codes are necessary since industries may use either one or both. The Standard Industrial Classification code was last revised in 1987 and the latest NAICS edition is dated 2002.

D&B's Industry Norms is arranged by SIC code, and you need to use the Standard Industrial
Classification Manual to use the data.

What are Key Business Ratios?
These let you compare the financial sheet of your own company or that of another company against the industry norm for that particular industry. It is a benchmark to measure how sound your company (or a competitor) is, or how profitable an industry is.

Why do we want to do this?
This is a tool to research risk, understand industry trends, and identify a company's strength and weaknesses. I can be used for mergers and acquisitions, to evaluate credit worthiness, solvency, efficiency, and profitability of a company. You can use it to set credit limits, asses a new supplier, perform competitive analysis or research the financial standing of a potential business partner. Investors can also use it.

How does it do that?
By using a set of 14 ratios - these are formulas used to measure performance. Ratios are set by means of the relationships within the financial statement of a company. The "The Key Ratios" are arranged by SIC code and short title, the year, and number of companies in the sample.

On the left is the typical Balance Sheet and Income Statement; on the right is the common-size Balance Sheet. The common-size Balance Sheet presents each item of the financial statement as a percentage of its aggregate total. Percentages are computed for all the individual companies in the industry sample. An average for each statement item is then presented as the industry norm. The typical figures are the result of translating percentages into dollar figures.

Ratios: there are 3: the Median, the Upper Quartile and the Lower Quartile (these are not extremes but midpoints of median and high or midpoints of median and low)

The Solvency Ratio
There are 6 combinations which measure the soundness of a business and how well the company can meet its obligations.

The Efficiency Ratio
There are 5 combinations which measure the quality of the company's receivables and how efficiently it uses and controls its assets, and whether the firm is paying its suppliers, or whether the firm is overtrading or under-trading on its equity.

The Profitability Ratio
There are 3 combinations which measure how well a company performs, and how the profit was earned relative to sales, total assets, and net worth.

If we use an example of each - let us compare liquor stores to book stores using these ratios.

Solvency
Current Liabilities over Net Worth: knowing that a company with current liabilities exceeding 66.6% of net worth is not a good company to buy, lease or have as a supplier.
Liquor store median has 78.7% (upper is 38.1% and lower is 196.2%)
Book store: median is 51.4% (upper is 27% and lower is108.6%)

Efficiency:
Assets to Sales: shows whether it is overtrading in relation to investment (leads to financial difficulties) or under-trading and not generating sufficient sales to warrant the assets invested. This shows poor sales management.

Profitability:
Return on Net Worth is probably considered the final criteria of profitability. A relationship of at least 10% is considered a good objective.
Liquor Stores: the median is 7.8 %.
Book stores: the median is 9%.

There's a lot here, but you don't have to remember all of it. You can come into the library and we can help get you started. If you want to use the library databases like Business & Company Resource Center or Ref USA from home or work, you'll need a card. You'll need to fill out an application and come to the library with something with your address on it to get one. You can print out the application from our website at www.aclibrary.org (click on Get a Library Card under Using Your Library) ahead of time and fill it out before you come. You can start using the databases right away, once you have a card. You can also use your card to use our wireless network in the library to use the databases along with the books we have recommended.

Next month: Centerville, Irvington and Niles branches

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