From: TomCrouser@aol.com
Date: Tue, 29 Oct 1996 15:03:46 -0500
Subject: More On Current Ratios
Content-Length: 23349
X-UIDL: 847122868.010

Crouser Report OnLine Copyright 1996 Thomas P. Crouser, October 29, 1996 -
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***** *****
More On Current Ratios
Transmitted from Charleston, West Virginia

Index: Our discussion of CURRENT Ratios comes into play as we hear from two
folks who have different ideas; DIGITAL Duplicators - what do you think? A
question for you.; Mariano in Argentina is looking for ATF-Davidson Press
Parts; A PERFECT Response to my Perfectionist Message and a question about Mac
 advice. John Giles responds.; NO Solicitation signs - do they mean it?; and H
UNGRY Business Lunches - a second look.
*****
Subj:	More on Current Ratios
To: 	tomcrouser@aol.com

I know that you have beat this horse to death but I still have my doubts in
your online newsletters. I liken the discussion to an investment strategy
discussion where one side says buy only high tech growth stocks and retire
rich and the other says only hold cash - it will always be there. The 

risky


growth stocks can fail - BUT so can CASH when inflation is taken into account
- neither is risk free.

In the same light extremes of current ratios are equally risky. Certainly a
10:1 is not wise with the rapid changes in technology and .1 :1 clearly is
bad. Maybe 2:1 is the best possible ratio -  then again maybe 1:1 is OK.
Issues I have with the current ratio as the only (or even a really major)
measure of health.

1 - Really bad business decisions can IMPROVE the current ratio: i.e. if I
moved my A/R cycle from its current 25 days to 50 days my current ratio would
improve a lot; i.e. if I greatly increase my inventory my current ratio
improves; i.e. if I lease rather than purchase my current ratio improves;
i.e. if I finance assets for five years rather than three years my current
ratio improves.

2 - While my current assets will be about 80% realized within the next thirty
days only about 20% of my current liabilities come due within the next thirty
days

3 - I tend to agree with John Stewart's constant harping that we think
nothing about hiring another employee ($30,000 in the next twelve months) but
we will not spend $15,000 on a cutter with a 30 year life to make our current
employees more effective and productive. Worshipping the current ratio adds
to this trend since hiring an employee does not affect the current ration but
buying more efficient, more productive equipment does affect it.
*****
Thanks for the comments. However, I have and do not advocate the Current
Ratio as being the ONLY measure of financial health. It is, however, the most
important measurement of financial health for a print shop.

I'll try to deal with your objections as you raised them. Risk Taker to Risk
Adverse. There are people who will normally take more risks (risk takers)
than other people (risk adverse). I work with printers of both kind each day.
However, advocating a 2:1 current ratio is not exactly taking risk out of
ventures. One can have a 2:1 current ratio (or if you are more of a real risk
taker, hold it to a 1.5 current ratio) and spend the overage on what you
would like. The real risk taker will buy new technology serving new markets.
A risk adverse person would buy proven technology for current markets or more
conservative risks. Point is, one can be a risk taker with a 2:1 current
ratio as well as be risk adverse. A strong current ratio simply indicates if
you have left enough working capital within the business for the business to
properly function after you have invested the funds.

Your statement 

really bad business decisions can IMPROVE the current ratio


though increasing A/R or inventory ignores the fact that a corresponding
increase in Accounts Payable or decrease in cash would occur at the same time
offsetting this as an improvement to the current ratio. (By the way, I also
use ratios such as Days in Accounts Receivable and an aging analysis of
receivables as well as Inventory Turns as additional measurements to expand
upon the current ratio.)

Also, if you leased rather than purchased and you handled the financing lease
properly on the balance sheet (capitalize it), then it would affect your
balance sheet and the current ratio the same as straight financing (not
leasing) a purchase. It is possible for you to enter into a financing lease
and NOT disclose it on the balance sheet but that is just like buying a car
and not telling your spouse about it. It doesn't change the fact you bought
the car and are obligated for it just because you don't disclose it.

And, yes, if you finance assets for five years rather than three years your


current ratio improves.

 But this is because your current ratio improves.
Huh? You are improving your current ratio by decreasing your requirements for
short term cash (which is what the current ratio measures). Therefore, you
are actually improving the ratio and that is not a bad business decision
assuming you need a better current ratio. (In fact, one of the strategies to
improve a current ratio is to restructure debt so the demand for cash is
decreased over the next twelve months. And while this may be a good short
term strategy, it is not a permanent fix.)

You noted, 

while my current assets will be about 80% realized within the
next thirty days only about 20% of my current liabilities come due within the
next thirty days.

 Well, this depends upon your specific make up of your
current assets and current liabilities. Companies with little cash, high
receivables and high inventory compared to companies with the same current
ratio but with lots of cash, little receivables and low inventory will
actually realize the cash at different times. This type of information is
measured using other ratios, again, such as Days in Accounts Receivable,
Inventory Turnover and perhaps some others. But this does nothing to diminish
the importance of the current ratio as the first indicator of financial
strength.

As far as a company adding another employee but not spend on a cutter to make
our more effective and productive, I have no problem with the statement. I
only point out that one of the basic pieces of 

equipment

 we need in the
shop is sufficient working capital which is expressed as the current ratio.
If you don't got it, then you'd better get it. Because neither adding an
employee nor spending on a cutter is likely to get you the working capital
you need in order to survive.

But, that point can be explained best in the comments received from this next
reader.
***** *****
Subj:	A Quick Ratio thought
To: 	TomCrouser

Tom. . .Quick Ratio: you have paid much attention to that
ratio---however----a quick ratio is meant to demonstrate to a bank or vendor
that you at present can pay them, and to a lesser extent that you may have
near term future ability to pay.

Tom: Let me interrupt the writer here. There is a difference in the Quick
Ratio and the Current Ratio. The Quick (or sometimes called the Acid Test)
removes inventory and other prepaid expenses from the current assets and then
divides by current liabilities. In our business, this is close to the same,
but it is not exact. And, I agree that the ratio is meant to demonstrate to a
bank or vendor OR TO YOURSELF that you have the ability to pay your
obligations. Now, let's continue.

But a complete picture can only be obtained by analyses of past earnings from
the Income Statement and future earnings projected on a Cash Flow Statement.
 In addition to that, a banker will ask you for personal statements.  In the
case of a proprietor (which many small printers are) the banker will
determine the credit-worthiness of your business by both your ability to pay
and whether or not you have sufficient assets personally to tide you over
during business downturn cycles or for the banks use in recovery of bad debt.

Tom: I absolutely agree. The current ratio is extremely important to us,
however, no one ratio tells the whole story. I've said that before. I also
double-endorse the comments about the cash flow budget because, from that, we
can actually predict what the resulting current ratio will be. I also agree
that bankers will want more than a good current ratio for collateral.

As a tool to ensure the ability to pay bills on time---What we are really
looking for is the ability to pay all of our bills on time, maybe early
enough to take advantage of a 2% discount.  In actual practice this may be as
low as .5/1 when all sales are cash and most vendors have terms of 30 days.

Tom: Sorry, I've got to stop again. I have NEVER seen a business with a
current ratio of .5:1 with the ability to pay ALL of it's bills on time!
Maybe some of the bills, but NEVER all. Now, further, I seriously doubt that
a Quick Ratio of .5 would be adequate to do this. Businesses are commonly
forced into involuntary bankruptcy with .5 current ratios.

If this business is growing more money would be needed so a higher ratio
would be needed.  If, however, all sales are made on terms and vendors are
all COD, then a Quick ratio of 2/1 might not be high enough.  In fact, the
appropriate Quick Ratio is very personalized for your business as a measure
of your ability to pay a bill on time. 

Tom: Very personalized for your business? Humm. Well, let's talk about the
printing business, not just some business. 80% or more of all sales are made
on account with terms of net 30 resulting in typically 30-40 days of
receivables at any one time. Inventory generally is not a big factor. Yes,
growth has an impact and most of us should be sustaining at least a 5%
increase in sales on AVERAGE over the last three years.  Now the rate of true
growth of a company will have an impact on the current ratio requiring more.
But, Quick Ratios are not that personalized in the printing business and, in
my opinion, need to be in the 1:1 to 1.5:1 area at a minimum.

As a tool to ensure survival of the business, the concept is great
but----Keeping money in your business checking account that you don't use is
not smart.  Investing it in money markets or easily convertible securities
might be...

Tom: I never said keep it in a checking account. Current assets include
cash, accounts receivable, inventory and pre-paid expenses (like the
insurance premium you pay in advance) along with such things as marketable
securities, certificates of deposit and treasury bills. No one is arguing
that the cash should not be invested wisely.

Small business owners are encouraged by their bankers to invest outside of
their businesses, to insulate yourself (read themselves) against bad times.
 The theory being if  you own things that can become collateral outside of
your business your press, copier, fiery, computer loan becomes more secure.
So if the bank, who you will probably need in any serious downturn, even if
you have a 2/1 ratio, wants to see that you are not putting all your eggs in
one basket.

Tom: I haven't really seen bankers encouraging us to invest outside of our
businesses. . .Most encourage us to have a strong current ratio so we can pay
our bills on time which is the point of your message. The theory of
collateral generally used is that the bank doesn't want to repossess a
copier, fiery or computer so they're going to look to other collateral from
the git-go. And, yes, just because you have a strong current ratio does not
mean that you will get a bank loan without other collateral.

Another thought about paying bills on time----I pay as many of my vendor
payables as possible with an American Express Card.  As you know the regular
cards from AMEX expect payment during the 30 days following the billing date.
 I have asked all my vendors to bill my card once a month on the day
following my billing date----this gives me 30 days before the charge appears
on a bill, and then another 29 days before I make my electronic remittance to
AMEX.  This gives me an additional month of cash-flow to invest plus the
bonus of free vacations courtesy of American Express Membership Rewards
program. The free vacations (went to Disney World nearly free including the
airfare last year) are not taxable at present according to my CPA and my
business cash-flow benefits because I don't remove cash for my vacation
expenses. Oh----the charge card bills get pretty big so my investments
liquidity has to match because if we have a downturn in business we need to
come up with the money to pay our bills----full circle to having a good
ratio---but maybe on our personal balance sheet in combination with the
business. Thanks. 

Actually it's a great idea. One of our Performance Group participants just
returned from Italy and his whole trip was on frequent flier mileage earned
by doing what our reader says. I say, Amen.
***** ***** *****
It appears to me that I might be misunderstood here somewhere. Never have I
ever advocated using one magic answer for anything. However, when I pick up a
set of financials, I look first for the current ratio to see, in general, if
the company can meet it's current obligations. I then look to the income
statement for sales and the percentage of direct materials, labor and
overhead. I then would look at a sales trend for at least four years. Now,
within that information, I have a lot of what I need to analyze a print shop.
Will I need more? Sure. But that's a good look at the highlights.

Now, can a company be described as being healthy with $1 million in sales;
25% net owner's compensation; growing like crazy; and a 0.5:1 current ratio.
Nope. One little problem and it goes into bankruptcy. But, don't take my word
for it. Ask the shareholders of Kiwi Airline who were pursuing that strategy.
Or ask the shareholders of ValuJet who had a good current ratio.
***** ***** *****
Ok. Now let's hear Shirley's question on the subject of Digital Duplicators.
What do you think of them? Message me with your response and we'll see just
what it is we do think. Here's her question.
*****
Subj:	DIGITAL Duplicators
From:	Shirley
To: 	TomCrouser@aol.com

Interested in your opinion on digital duplicators - ABDick 6790, RISO, etc.
Spot color, not full color. I don't see much written about them. Am
considering buying one because everything we run on our ABDick 360's can
(probably) also be run on the digital duplicator. Had a job run on the ABDick
6790 last Wed. Today (Mon.) we run the 2nd side on the press... the first
side isn't dry! Didn't present much of a problem but gives me cause to
pause... it was 8.5 x 11 Scott Vellum Bristol... SHOULD'VE DRIED!

The thing that kills me is they want me to sign up for a 60 month cost per
copy rental, and I haven't personally worked with one before. So I sign this
$11,000 contract and THEN find out I hate it? Then I'm stuck with it!
Anything you can tell me to help me make this decision would be most
appreciated.

Shirley added the following in an additional message

Have you seen the output lately? I thought it was pretty low end myself when
I saw it years ago. Wouldn't have gone near it with a ten foot pole. Now it
looks darned good. Particularly when connected to the computer. Granted, I'm
not going to sell it to a major corporation for their advertising literature,
but for the average flyer for the local appliance store or the local
electrical firms in-house forms, I believe it's quite adequate. I would say
that 98% of my customers could not tell the difference between what came off
my ABDick 360 and what came off the digital if the same job were presented to
them both ways (which I DO plan to test that theory.)

AND if a customer comes in to see a proof of their flyers, I load it up while
they're proofreading, they say it looks great (They always do - I do great
typesetting :)  ), when can I have 500 and I say give me about 10 minutes - -
- that blows my press out of the water. I can't even get the plate made that
fast, much less print it! . . .Later... I gotta run now, my ride's here.
  Shirley
*****
Well, people. What do you think? Any experience with digital duplicators?
Message me and I'll compile and send them out next week. In the meantime,
look around the shop for some ATF-Davidson parts. Mariano is interested in
them.
*****
Subj:	ATF-Davidson Press Parts
From:	sofiana@cano.com.ar (sofiana)
To: 	TomCrouser@aol.com

Hola soy de Argentina y estoy averiguando sobre unos repuestos de unas
maquinas de la compania ATF-DAVIDSON ,SI PUDIERA AYUDARME DANDOME LOS DATAOS
DE LA EMPRESA SE LO VOY A AGRADECER, mi e'mail es  sofiana@cano.com.ar
Mariano Montivero
*****
For those of us who do not read Spanish, Frank in Panama translated for me:
Mariano Montivero, in Argentina is looking for parts for ATF-Davidson
presses. You may contact Mariano at sofiana@cano.com.ar
***** ***** *****
Major Changes to The 1997 Crouser Guide: 3% Increase In Your Overhead Costs;
More Competitive Carbonless and Coated Stock Prices; New Matching Letterhead
Envelope Section; Increased Drill, Fold, Number and Score Prices; Color
Connectivity and Color Copy Prices; High Speed Copy Price Grid; More
Competitive Carbonless Set Values and more. . .

To Reserve Your Copy of The Crouser Guide's 1997 Edition, send $203 ($195
plus $8 shipping) to Crouser & Associates, 235 Dutch Road, Charleston, WV
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(304) 342-5187 and use your MasterCard, Visa or American Express. We also
will ship C.O.D. Shipments will begin in December 1996.
***** ***** *****
And, now, here's a Perfect Response to my perfect comments about
Perfectionist Owners.
*****
Subj:	PERFECT Response
From:	Precise
To: 	TomCrouser@aol.com

Some comments re your latest newsletter. You wrote . . .

Champions strive for
perfection in results. . . .Perfectionists strive for perfection in
processes. I see much of the ladder and little of the former in many. We must
do what is most important, not what is most fun. Identifying and prioritizing
is everyone's big challenge. Here's another comment 'bout the same subject.


My comment. . .I realize that ones 

climb

 toward perfection may require a


ladder

 but when referring to later events, just remember that later and


latter

 are alike. Sometimes perfection is needed.

RE: (John) Giles' comment on MACS and PCs, he wrote. . .Most quick printers
get along with the midrange Macs. They are running at least 40 megs (the
minimum required by Adobe Photoshop).   Most are getting 64. They also are
opting for larger hard drives. So if budget is an issue, go for a slower
processor with more RAM and bigger hard drive. . . . .My comment. . .This
info is incorrect as stated. First, 40 Mb of RAM is not the minimum required
by Photoshop v3.0. On the Mac, 4.8 Mb of RAM is minimum, preferred size is
5.5 Mb. We are running the old Mac Quadra 840AVs with 16 Mb on board plus Ram
Doubler (The best, least expensive way to expand RAM) giving us the
equivalent of 32 Mb of available RAM. We do set the memory allocation for the
program generally at 12 Mb. Photoshop runs just fine.  If the 

40 Mb

 was a
typing error, perhaps we should call in a perfectionist! As always, I enjoy
the comments and questions. . . Precise
***** *****
Well, I don't know about the former, but I checked the information on the


ladder

 with John and here's what he said.
*****
From:	JohnG247
To: 	TomCrouser

Tom. . .The 40 megs of RAM recommended for Adobe Photoshop was not a typo.
Most Photoshop experts recommend 40 megs for Photoshop when running on a
PowerMac. The 840 is not a PowerMac and does not have the overhead that is
required by the PowerMac. Since the 840 is not made or sold any more and all
Mac today are basically sold with the new chip, I use the 40 meg figure.

Also, if you read the information relating to performance of Photoshop on the
Internet and AOL, you'll find that the experts do not recommend using RAM
Doubler when using Adobe Photoshop. I recommend that web users access the
Adobe home page at www.adobe.com for more information on getting better
performance out of Photoshop....no matter platform is being used. Thanks. .
.John
*****
Well, tank (sic) you. Here's a question which popped up again about NO
SOLICITING signs.
*****
Subj:	NO Solicitation
From:	TomCrouser

A reader wrote: . . .at the Pittsburg meeting you mentioned something
about that sign you see in buildings that say 

No Solicitation.

 You said
that had to do with unions. What gives?.

No Solicitation signs in buildings are put up because the National Labor
Relations Board ruled if a company allows the Boy Scouts, churches, etc. to
solicit employees on company premises and on company time, then the employer
MUST allow labor unions to solicit employees on company time, etc. Therefore
the 

No Solicitation

 signs. . . .Solicitation, by the way, is going from
worker to worker to sell candy, for instance. Solicitation is not sales
people making sales calls on the business or organization, although I will
admit some people think that's what it means when they put up the sign. But,
they should put up a sign which says 

No Salespeople,

 not 

No Solicitation


. . . .
*****
Another reader agrees with Hungry that business lunches can become quite an
ordeal. Here's his response.
*****
Subj:	HUNGRY Business Lunches
From:	Hurried
To: 	TomCrouser

Tom - I agree with Hungry that a business lunch implies that the sales person
now expects something from the client.  However, when used properly (special
occasions, holidays, etc.), they can be an asset and can go a long way to
solidifying the relationship.  I have made it a practice to use them
primarily when I have a problem with an account.  It's a great way to get the
client out of the business climate and in a neutral place to discuss the
issues at hand.  Otherwise, I just don't have the two hours it takes to 

do
lunch.

  A business lunch is not a meal, it's an event! 
*****
Yep (sic). The business lunch implies the sales person expects something from
the client. I expect to sell something. Anyway, I would encourage all of us
NOT to use them just when there is a problem with an account. Most of us sell
half of our sales to 25 accounts or less. To these customers, trust me, I
will be more than happy to make the two hours it takes to 

do lunch.

 And
I'll do it on a regular basis.
*****
Well, that cleans off the desktop for this afternoon. Will see you again,
soon.

In the meantime, Happy Trails. Tom and Pamela Crouser
*****
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