WHICH ARE THE FIGURES THAT COUNT

T Raising funds to finance assets
T Turning assets into sales
T Turning sales into profit
In Chapter 4 (‘How do you measure financial success?’), we were
introduced to return on equity as a measure that can be applied within
any business to assess how effectively investors’ funds are being turned
into profit.
Let’s consolidate these concepts. The first stage of the profitmaking
process is all about raising cash from shareholders and in the
form of borrowings in order to finance assets. The second stage is all
about turning these assets back into cash in the form of sales. These
first two stages are therefore all about cash management. It is only the
third stage that is true profit management: ensuring that the sales generated
result in increased wealth for the shareholders. Return on equity
provides a measure that allows us to assess how effectively the entire
process is being managed. This places us in a position to develop a
coherent view of any business.
STAGE IN PROFIT-MAKING IMPACT ON CASH PERFORMANCE
PROCESS AND PROFIT MEASURE
Raising funds to finance assets
Turning assets into sales Cash management Return on equity
Turning sales into profit Profit management
A common failing in many businesses is an obsession with
profit management while disregarding cash management. Given that
two out of the three stages in the profit-making process hinge on cash
management, this explains why many companies run into cash-flow
difficulties. It is impossible to generate a sustainable return on equity
without sound management of both cash flow and profit. This is
because return on equity links the two concepts: it looks at how effectively
cash raised from investors is being turned into profit.
Having a coherent view of a business enables us to identify the
four key figures that drive it. To do this, let’s revisit the Edible Plate
Company, introduced in Chapter 3, where you raised $50,000 from
shareholders and $50,000 as a loan