A frequently overlooked financial measurement for small and medium sized businesses is ROCE, Return on Capital Employed (easily confused with Return on Common Equity). Particularly in small- and medium-sized businesses, this measure is commonly not put in front of senior executives, who get a steady diet of detailed reporting on gross margins and net profit.

Definition

Return on Capital Employed is a measure that compares profitability against the capital it takes to generate that profit.

Calculated as:

Interpretation

Return on Capital Employed will show the amount of profit each dollar of investment generates.

As a manager, it is reasonable to compare ROCE against the interest rate to borrow money as well as the return on a relatively low risk investment (money market rate or maybe long term bonds).

If your ROCE is lower than your borrowing interest rate, it means that for each dollar of borrowing, your shareholders/owners are losing money. You would be borrowing money and earning less than the cost of borrowing.

If your ROCE is lower than an alternate investment’s rate of return (particularly one with less risk), it may be worth examining moving the investment capital away from the low ROCE business.

ROCE compared to Profit Margins

ROCE shows the effectiveness of your capital invested in your business.

Profit Margins show the amount of money left over after expenses versus the total amount of revenue. It is a ratio of how much you get to keep.

While both are certainly key metrics of business performance, in managing my own company, I look first at ROCE and then secondly to Profit Margins. Both are ratios related to profit, but if my capital is poorly deployed in a certain business and could earn more elsewhere, how much of total revenues I keep may not matter.

Real Example

As an example, I looked up public information on Coca-Cola and Pepsi today:

1. Coca-Cola (KO)
   • ROCE: 22.7
   • Net Profit: 23.6
2. Pepsico (PEP)
   • ROCE: 15.9
   • Net Profit: 12.8

Here are two companies, in the same industry, with a product that is virtually the same (although I have to admit, I’ll take a Coke over a Pepsi any day).

Coke’s performance is significantly better. “The Real Thing” generates $0.23 profit for each dollar of capital it is holding. That is sort of like a 23% interest rate on one’s investment. Sugar water generates $0.24 profit from each dollar that comes into the company. What a great business to be in! It is a money making machine.

“The Taste of the New Generation” does significantly worse, but still quite well. It generates $0.16 profit from each dollar it holds for its investors and keeps $0.13 of each dollar that comes in.

Another Example

Let’s assume two businesses, one a grocery store and the other an airline, both have a net profit margin of 1%. Both industries are high revenue, low profit businesses. Let’s say that both generated $100 million dollars in profit. As a grocery store generally requires less capital than an airline. The grocery store will have a higher ROCE and might be the better business from an owner’s perspective.

Photo Credit: Jofre Ferrer

As a manager, people are always matching your words to your actions and what they already know about you. People are generally quite effective at spotting authenticity (or as shown below, lack of authenticity).

An absurd case has recently occurred in Washington D.C. surrounding one of the Washington Redskins who commented on Ines Sainz, the reporter whose locker room treatment became news last week.

Clinton Portis went on a local radio show and stated the following:

You know man, I think you put women reporters in the locker room in positions to see guys walking around naked, and you sit in the locker room with 53 guys, and all of the sudden you see a nice woman in the locker room, I think men are gonna tend to turn and look and want to say something to that woman. For the woman, I think they make it so much that you can’t interact and you can’t be involved with athletes, you can’t talk to these guys, you can’t interact with these guys.

And I mean, you put a woman and you give her a choice of 53 athletes, somebody got to be appealing to her. You know, somebody got to spark her interest, or she’s gonna want somebody. I don’t know what kind of woman won’t, if you get to go and look at 53 men’s packages. And you’re just sitting here, saying ‘Oh, none of this is attractive to me.’ I know you’re doing a job, but at the same time, the same way I’m gonna cut my eye if I see somebody worth talking to, I’m sure they do the same thing.

This seems like an authentic statement from Clinton.

Later that day after being pulled into meetings with the head coach and other Redskins execs, he issued the following statement:

I was wrong to make the comments I did, and I apologize. I respect the job that all reporters do. It is a tough job and we all have to work and act in a professional manner. I understand and support the team on these issues.

Hmmm . . . this seems inauthentic.

I find it hard to believe that Portis was the author of the second set of remarks. The first statement is at points hard to understand, certainly lacks proper grammar, and seems to represent Clinton Portis’s views. The second appears written by the public relations department. It certainly lacks the required gonna’s and you-know’s. Perhaps Clinton Portis just expresses himself better in writing? You know? There seems to be a difference in style, tone, and content.

If one needs any proof of my theory, yesterday Portis said the following on his radio show:

When people don’t wish you the best, there’s always something that they gonna find. You know? I think everything that come out of my mouth is the truth. Whether people like it or not, it’s always the truth. With the comments that I made that you didn’t agree to, they were true. And some people can’t stand the truth, and some people do.

Again, we see authenticity. Grammar and narcissism aside, it seems apparent to me what the authentic Clinton Portis thinks.

How does authenticity relate to management? An authentic Clinton Portis might say: Below you gonna find a couple places where you can cut your eye, you know?

• Better Make It Real – “With distrust of corporations at an all-time high, companies who fake it are, in all probability, doomed. In contrast, organizations who ARE who they say they are and DO what they say they do are able to thrive. Organizational authenticity IS attainable. Yet it is not a destination—it is an ongoing journey.” On the web page is a link to download the introduction to the book, Better Make It Real.
• Gaining An Edge: Authentic Leadership Lessons – “Authentic leadership is leadership that can be trusted; leadership that is, in fact, as it is represented.”
• Leadership and Authenticity: Why Leaders Seek It, Why So Few Experience It, Why Fewer Still Can Sustain It, Why Organizations Suffer From Lack Of It – “Organizations want their leaders to show themselves, to get out from behind the executive suits, to descend from on high and grab a sandwich, care, listen and, most importantly, show themselves to be human after all. “

Photo Credit: Erica Marshall

In Part 1 of this series of posts, we discussed the definition, interpretation, and calculation of Days Sales Outstanding (DSO).

This post examines how Days Sales Outstanding effects cash.

We are going to use the same scenario as in the previous post:

• Our business is a technology services company
• It is earning $300K in revenue per month
• It generates its invoices by the 7th of each month for the previous month
• The business has a 60 Days Sales Outstanding

In addition:

• We will ignore that usually a business needs to purchase capital items at the beginning of its operations and expenses that get paid in advance
• We are going to assume a 10% profit for the business (The business makes $30K in profit each month and has $270K in expenses.)
• We are going to assume all expenses are paid at the month end (many like payroll are paid earlier)
• We are going to assume for line of credit calculations that all money is borrowed and we are paying 8% annual interest calculated and paid monthly (in a real example this expense would probably lower profits)

Results:

Take a look at the slides below that show you the difference between 60 and 30 Days Sales Outstanding

Click to see the results for 60 Days Sales Outstanding

Click to see the results of 30 Days Sales Outstanding

Let’s compare the two scenarios:

• 60 days sales outstanding
  • At three months: $810K of cash tied up in receivables
  • At twelve months: $540K of cash tied up in receivables
  • Average over first 12 months: $630K
  • Line of Credit Interest Costs: $50K
• 30 days sales outstanding
  • At three months: $510K of cash tied up in receivables
  • At twelve months: $240K of cash tied up in receivables
  • Average over first 12 months: $380K
  • Line of Credit Interest Costs: $30K

You can see that there is a big difference between these two scenarios.

Part 3 of this series is going to discuss strategies for lowering days sales outstanding.

Photo Credit: The Pants

This is the first of a series of posts looking at a financial measure to which most small to medium businesses do not pay enough attention. Not only can careful attention to the Days Sales Outstanding measure have a direct impact on a company’s bottom line, but working to improve this measure will have other less obvious benefits to your business.

What is Days Sales Outstanding (DSO)?

Days Sales Outstanding measures the average number of days it takes a company to collect revenue after a sale has been made.

This is a metric related to cash. Through converting sales to cash quickly, cash can be put to other purposes and used again.
General Interpretation

A low DSO is good – you turn sales into cash quickly.

A high DSO is less good – it takes longer to convert your sales into cash.

The Calculation

DSO = Accounts Receivable / Amount of Sales per Day

I like to look at numbers in trailing twelve month periods. It makes every month the end of a year and it removes monthly abnormalities. Many otherwise hard to spot patterns become easier to see.

Step 1 – Calculate Accounts Receivable Amount

For my business I use the average month end accounts receivable amount from my monthly balance sheet over the last 12 months.

To make our numbers simple, lets assume that on average we are carrying $600K in accounts receivable.

Step 2 – What are my total sales over the period I’m examining?

In our example, let’s say sales over this period (12 months) was $3.6 million. So our business is doing $300K of business per month and approximately $10K per day. To be exact 3,600,000 / 365 = 9,863. I’m going to round up to $10K to keep the numbers simple.

Step 3 – Divide Accounts Receivable by the Amount of Sales Per Day

$600,000 / $10,000 = 60

So in our example we have 60 days worth of sales tied up in receivables, a DSO of 60.

This measure works for other time periods as well. Let’s say that we were looking at a fiscal quarter. Over three months our sales were $900K (3 x $300K). Guess what? Our daily sales are still $10K ($900K / 90 days).

In actuality sales come irregularly over months, so the number vary.

It is important to make sure the Accounts Receivable Period matches the Sales per Day period. For example, let’s say I want to calculate this for a month. I’d take the average Accounts Receivable balance on each day of the month (or more likely just take the beginning amount and the ending amount and average them). I would then divide by the sales per day.

Stay tuned for the next article in this series where we talk about the implications of DSO.

Photo Credit: Lynchburg College Archives
– Photo of an old invoice

Below you will find a second dose of positive customer service stories. You can find part one here.

• Reedy Carpets in Orlando stands behind their carpet.
  

  We contacted Reedy Carpet who immediately contacted Shaw Carpets. They arranged for an inspection and upon receiving the report they volunteered to replace the carpet entirely even though “pooling” is not covered under their warranty. . .This experience tells me that I was correct in my choice of a dealer and that Shaw Carpets still believes in and practices good customer service.



• Strong Elder Care Businesses Focus on Customer Service During Challenging Economic Times – This is a press release, but still has some good information.
  

  While businesses need to focus carefully on cutting expenses where they can, for a company to survive, customer service needs to be bolstered, not cut. aQuire Training Solutions has developed a series of new courses on basic – and advanced – customer service skills. These courses are designed for caregivers and other staff working in the senior care environment: home care agencies, assisted living communities, nursing facilities and more.



• A custom canvas company that proves they know their customers. Carrie Lewis, an artist, raves about Signature Canvas. The company provides excellent customer service and included a customized certificate for the artist.
  

  Talk about a Class Act! If you’re looking for a company that gives individual attention to every order, that custom builds supports using first rate materials or if you just like to try new things, give Signature Canvas a try. You will not be disappointed in the product or in the way you are treated.



• Customer Service in Switzerland.
  

  I had such a good experience and I want to share it with you . . . Monday, I went to H&M to buy some clothes for my little daughter. I began to look around and found stuff for me as well . . . Anyway, long story short, I bought a nice cardigan and put it in the washing machine. The tag was saying to clean it by machine on the wool cycle, as I did. It came out so small . . . I looked for the bill, and my dear husband throw it away . . . I decided to send an email to H&M and told them my story . . . The very next morning, I received an email back. The lady was going to take care of it and contact the quality department . . . She told me to bring it back where I bought it, she will contact the Manager and they will give me my money back!



• Where Has This UPS Envelope Spent The Last 14 Years? The UPS lost a package, found it 14 years later, the contents are missing, and they want to honor their claim.
  

  This week, Paul received a package back from UPS that had somehow never reached its destination. That”s not so unusual. What was unusual was how long it had wandered off for. He had mailed the next day air envelope at least fourteen years ago. . . While it”s curious that the package went missing for so long, lost its contents, and then still found its way back to Paul, we are rather impressed that UPS is willing to pay his claim if he does ever manage to figure out what was in that envelope… a decade and a half ago.



• Excellent customer service at Graham & Brown.
  

  My wife took a few hours to browse and add items to her shopping cart to review with me later. The next day we had time to look over her selections. Unfortunately all of the items in her cart had disappeared. She even created an account to make sure that the items in her cart would be saved.

  She called Graham & Brown customer service to tell them about the problem. They quickly apologized and explained that the site had just launched. Their web team was working out some bugs, and they were glad to hear our feedback. Customer service also offered to send us the wallpaper samples that we chose free of charge. As we make our final wallpaper selection I’ll be happy to give Graham & Brown my business because of this great experience.

Photo Credit: Phil Dowsing

Visualize, if you will, a tree removal company. Executives sit around trying to come up with a name that will make customers feel secure in your competence. Aha, we should call ourselves “Reliable Tree Services.” We could even put the word RELIABLE right on our cranes.

Do you think the manager’s ever thought they would see the following pictures? What a mess!!!

[via Attuworld]

Now that is customer service!

So frequently, we talk about poor customer service. I wanted to find some examples of excellent customer service. Below are 10 examples of what people found to be excellent customer service. I hope one of them triggers an idea.

1. Customer Service Gone Terribly Right – Nintendo makes exchanging a Wii convenient.
2. “She has such a cheery disposition” – Whenever anyone steps up to the counter, Weaver waves a blue and white pompom and chirps: “Hi, everbody. Welcome to Arby”s”
3. Olson Tire Reaches 50-Year Milestone – Interesting story of how a business grew by serving its customers. From the comments: “I have been purchasing tires from Olson”s since 1985. Never, never have I had either bad tires or bad service. Their approach to customers is golden. Thanks for being there Olsons.”
4. A Customer”s Positive Experience with Remington – “Remington could have hung tough and made Rick pay the shipping. Instead, for $10 they bought themselves a loyal customer for life. That’s smart business.” After the main story there are a lot of positive (and negative) customer service stories (most gun related).
5. 10 Companies That Treat You Right – A rundown of the companies, ranked by the percentage of “excellent” scores they got in a survey that Zogby International conducted for MSN Money.
6. Asiana Airlines Reviews – This airline has so much positive feedback. I”m going to take a chance and just link to the general forum at Skytrax. I bet you the top few reviews are all positive.
7. Magnolia Restaurant in the Turks and Caicos – You need to read the whole string of comments. It”s a beautiful lost shoe – found shoe story.
8. Excellent Customer Service From Amazon.com – A post from 2006, but a good story.
9. Apple Repair Store Recovers From a Mistake They Made – By a Lot – This is a really good story. There is some adult-language in the post, so skip this one if that offends you.
10. Customer Service at Ritz-Carlton: It’s All About People – A story of Ritz-Carlton”s regular excellent service

And as an extra bonus:

• Airport Fastpark – This is a story written by me regarding one of my favorite companies. Can you believe it is an airport parking lot?

This was one of the harder posts to write. People do not write often enough about their positive experiences. Writing a post about Poor Customer Service would be difficult as well – but because there is so much written about it, it would be hard to pick what is included.

Let”s reverse that trend and talk about the excellent service we have received. I”d love to hear your stories in the comments.

This post was originally published on Neal Levene”s Simple Complexity blog on August 14, 2009. It has always been one of the top rated posts from that site, so I have republished it here. It was a bit off topic for that site, but right on topic for here.

Photo Credit: Matt Watts

Photo: Flickr – Stuck in Customs

Via The Toilet Paper Entrepreneur | The Top 17 Business Blogs For Toilet Paper Entrepreneurs

On TPE, 17 Business Blogs are listed

1. How To Change The World by Guy Kawasaki
2. Small Biz Bee by Matthew Ringer
3. Duct Tape Marketing by John Jantsch
4. Instigator Blog by Ben Yoskovitz
5. On Startups by Darmesh Shah
6. Escape Cubicle Nation by Pamela Slim
7. Small Biz Trends by Anita Campbell
8. Young Entrepreneur Blog by Matthew and Adam Toren
9. Startup Nation by Rich and Jeff Sloan
10. Entrepreneur Blog At About.com by Scott Allen
11. Strategy Stew by Ivana Taylor
12. Work Happy by Carson McComas
13. Entrepreneur’s Journey by Yaro Starak
14. The Closet Entrepreneur by Thomas Carrillo
15. Business Pundit by Drea Knufken
16. Blogtrepreneur by Adam and Matthew Toren
17. Rise To The Top by David Garland