As Willie Nelson would sing I’m on the road again. This time to a new city I’ve never experienced. I just spent a day training in Wichita, Kansas. I was working with the International Sourcing Management (ISM) Wichita chapter. I’ve spoken at the ISM national conference for 9 consecutive years now and over those years some of the local chapters have had me do a session for them.
ISM is a purchasing manager association; these professionals need finance acumen for two major reasons. First, they need to understand how to read the financial statements of their vendors in their supply chain. It’s pretty critical for a business to have partners that are financially strong. It’s also nice to be able to understand how profitable a partner is to understand if there is an opportunity for pricing negotiations.
In this session, we went over some of the key ratios that a purchasing manager would want to look at and understand. We use a sample company to go over gross profit margin percentage, operating profit margin percentage, and net profit margin percentage on the income statement. We then look at leverage and liquidity ratios taken from the balance sheet. These ratios include the current ratio and the debt to equity ratio. These ratios are all critical to understanding the viability of a supplier. Probably one of the most important of the group it the current ratio which is current liabilities divided by current assets. This ratio is a measure of a companies’ ability to pay its bills. A current asset is any asset that is cash or should convert to cash within one year while current liabilities is any debt that must be paid within one year. Clearly, if your current liabilities exceed your current assets there is a chance that a business will struggle financially. We want that ratio to be above 1.
Another issue with this group is analyzing return on investment (ROI). Since these folks are buyers sometimes they need to analyze the return on major purchases. In this class the group asked me to teach the key ROI tools such as net present value (NPV) and internal rate of return (IRR). These metrics are key to justifying major investments such as capital expenditures. The class requested that extra coverage so I provided it. It’s not often that a group gets excited to hear more about NPV and IRR, so that was pretty exciting.
I spent two nights at the Hampton Inn and Star Casino. Food was fine. In fact, the last night there the ISM chapter leadership hosted a very nice dinner at a restaurant called Woodfire. I had a very nice surf and turf dish. If you are visiting Kansas you’d better give steak a try. I found the people I dealt with from the cab drivers to the hotel staff and others in Wichita to be especially friendly. A somewhat different feel than I get when I visit Manhattan.
I am now embarking on several financial training sessions over the next two months so there will be much more of the exciting blogs to come. Stay tuned.
Do you need business finance training? Contact us at 818-591-5955 to talk about scheduling a training session.