How marketers can measure their businesses' health
Commercial managers have the responsibility of producing and maximising profitable income for the long term future of their business. To do their job effectively, that is, to maximise sustainable profitable revenue, they need to be aware of the market and economic environment in which they operate.
Understanding the state of the market and economic environment in which their business operates is fundamental for the commercial manager. But commercial managers must also be aware of the economic health of the business in which they work. What about the economic state of the business? How well is the business performing, and how do we know? How much is being invested in getting and retaining business and what return is being made on that investment?
Commercial managers must ask questions about the condition of the business and its ability to weather any economic or market storm. While brand, image and market share remain important, the commercial manager must also concentrate on those indicators that show the health of the business and where problems may be arising.
What indicators should the commercial managers look for? The first indicators are for the financial strength of the business. An examination of the balance sheet will show how the assets and liabilities are balanced, from which the ability to pay creditors may be derived. This is done by calculating, what is known as the Current Ratio for Liquidity.
The Current Ratio for Liquidity, is defined as the current assets divided by current liabilities. “General opinion” considers that ideally, the Current Ratio should be 1:1, so that assets should equal liabilities. When assets are larger than liabilities, it is generally considered that the assets are underused. However, when its assets are less than its liabilities, a business is generally considered insolvent. The immediate liquidity of the business, which is the assessment of its ability to pay its immediate creditors, is measured by the Quick Ratio or “Acid Test.” The Quick Ratio is defined as the current assets less stock, divided by the current liabilities.
While these two ratios are good initial indicators to the financial health of the business, they are relevant only at a particular time. Neither the Current Ratio nor Quick Ratio relate to a business’s trading state, marketing position, management resource, workforce or intellectual property. However, while the Current and Quick Ratios provide initial warning signs concerning the overall health of the business, it is important that commercial managers should know what other indicators are relevant in indicting the current and potential trading strength of the business.
If commercial managers are managing their resources responsibly, they should be continually looking at a variety of business indicators, which will quantify performance in a number of specific and significant areas. In reality, many businesses fail to do this. Therefore the commercial manager needs to know which key indicators may act as warning signs of inefficiency and under achievement.
The right indicators
The prime task of the commercial manager is the generation of sustainable profitable revenue, thus the most obvious initial performance indicator, is the current sales income trend. The comparison of sales income levels at different times soon shows the general trend of income, as do the complementary data for units of sales over the same period.
The balance between production and sales is indicated by movements in stock turn. If stock turn is slowing, it indicates that production is starting to outstrip demand, which may store up problems for the future, particularly with cash flow. If the conversion rate from enquiry to order starts to reduce, then it is important to examine the trend in the levels of enquiry, as well as the time taken between an enquiries and orders.
The trend in calling rates for sales staff can be an important indicator, especially when related to trends in the conversion rates of enquiries to orders, and order to sales, as it indicates the state of customer requirements and market awareness. Regular checks of the customer base and order frequency will indicate movements in customer attrition and the maintenance of the customer order base. Any shrinking order base requires the definite attention of the commercial manager.
Since commercial managers are responsible for the production of sales income, they need also to be aware of the level and trends of bad debt and late payment. These two indicators show whether the money promised by the level of invoice sales, actually turns into the necessary cash revenue, and may highlight a need for changes in credit and payment terms
The indicators listed here are not exhaustive, as there are many others, which may be significant to particular businesses and industries. Used regularly, the right indicators can provide timely warning of emerging problems. It is then down to the commercial manager to devise actions to counter negative activity, or engage alternative actions to meet the objectives of the marketing plan.