Asset turnover balancing

BY MATTHEW D. MOHR

Financial advisers are often quick to produce evidence to support rebalancing assets to fit a client’s risk tolerance and desired asset mix after a new year begins. A business owner probably wants to evaluate the asset balance within an enterprise as well.

It is a good idea to review your balance sheet each year and compare your asset levels to similarly sized businesses in your industry. How much cash, accounts receivable, inventory, equipment and other assets do you have as a percentage of sales? What percentage of your total assets does each represent to others in your industry of similar size, and how do these asset levels compare to the big players and top producers?

By comparing your asset levels to others in your industry, you can identify where opportunities for better managing a business exist. Underutilized assets are very common as a business and industry matures.

As you evaluate your asset base and asset mix, pay attention to the difference between your book value of the asset and what the market value may be. Accumulated depreciation can drastically affect your comparison.

It is not unusual for an older established business to have a large portion of its assets depreciated down to low or nearly no value. As a result, the “production” of these assets can look very good compared with a relatively young business with newer assets and little depreciation.

A good friend of mine was able to calculate a business’s volume based on the number of vehicles employed. When he uncovered a business had more vehicles per dollar sale than average, he would aggressively work to grow the business, and he was very successful when growing the enterprises under his influence. He discovered he could be much more aggressive than what was considered “normal” by employing those underutilized assets better.

After receiving year-end financial statements, a worthwhile exercise is calculating your dollar asset (by category) per dollar sales and dollar profit. Comparing your ratios with industry averages will point you to opportunity. PB

Matthew D. Mohr CEO, Dacotah Paper Co. mmohr@dacotahpaper.com

Eric Newell