It is common for many of us to invest when times are good and hold back when times are bad. What if we flipped this around and harvested when times are good and invested when times are bad? How could this approach work, and what impact would it have on our people, our clients and our business? What if I told you the most successful businesses I know are already doing this? What do they do different than the rest of us?
To start to figure this out we need to look at their financial statements. What we will find is that these companies have consistent and high gross profit margins, they have consistent operating costs, they have a strong balance sheet, and they make more money than they spend.
A consistent gross profit margin shows that the business is disciplined. The higher the gross profit margin, the more durable competitive advantage the business has. If gross profit margin is inconsistent, it shows there are not adequate controls in the business.
Consistent operating costs are important because as a business grows so does the infrastructure to support the growing business, which ties back to a consistent gross profit margin. If operating percentage is increasing, then management may not be managing overhead to account for the decrease in sales, or there are not enough sales to support the operation.
A strong balance sheet allows a business to manage through any business environment. These businesses typically generate more cash than they consume. Financial ratios are important to look at and drive a successful business. Some of the more impactful ratios are net profit margin, gross profit margin, operating profit margin, return on equity, debt to equity, quick ratio, current ratio, cash ratio, free cash flow, day sales outstanding and day payables outstanding.
I love talking to people about how they run their business, what they look for, how they manage and what lessons they have learned. Also how they affect their people and their clients. Next time we run into each other, let’s talk and develop this conversation further. I want to learn from each of you about how to better our business and the industry.
In addition to being 2022–2023 president of the Association of the Wall and Ceiling Industry, Travis Vap is CEO of South Valley Drywall, Inc. in Littleton, Colo.