Figures Don't Lie But Liars Sure Can Figure

Of course figures don’t lie, they are inanimate, and they are what they are and only take on the meaning we ascribe to them.  But when I listen to politicians offering the same survey or research to support diametrically opposing points of view it makes me wonder just how valuable are statistics and the measures we can derive from them.

Well from a business standpoint as long as we are not trying to fool ourselves (or others) measuring is extremely valuable.  Certain metrics can provide insight into past performance and allow comparisons to competitors and industry standards and can indicate trouble lurking just around the bend.  We can also, and should, establish goals and milestones that can be measured numerically, thus providing benchmarks indicating achievement or failure and the need to adjust our strategy or to forge ahead as planned.

From a financial standpoint there are many traditional measures used to evaluate performance and health of a business which are relatively easy to compute.  For example liquidity ratios and asset turnover ratios such as:

1.         Current Ratio: current assets divided by current liabilities.  This measures the overall liquidity position of a company – the higher the ratio the more liquid the company.

2.         Receivables Turnover: annual credit sales divided by accounts receivable.  This ratio indicates how quickly a company collects its accounts receivables and thus can be a critical data point in estimating cash flow.

3.         Inventory Turnover: cost of goods sold divided by average inventory.  Indicating the turnover of inventory this ratio can provide valuable information for managing inventory levels and projecting inventory cash requirements.

For further discussion on financial indicators and other ratios please go to NetMBA.

But aside from financial measurements what else should a company measure?  That depends on the type of company, its industry and to a great extent its goals or mission. But certain matters are common to all business operations and can have a significant impact on success or failure, such as employee morale.  For an insightful discussion on what to measure and how to measure some of these non-financial attributes please see CEOs: just start measuring.

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