I am the chair of the finance committee at a local tennis club and at our last meeting we discussed which key performance indicators (KPI’s) would help the board understand how the club is doing. One KPI that we settled on is the current ratio, but several board members are not financial types so we discussed how to label KPI’s so that they are easier to understand. One of the committee members who has taught finance classes suggested that instead of calling it the current ratio we call it the “Got – Owe” ratio. So let’s explore the Got – Owe ratio.
How is it calculated?
The “Got” portion of the ratio are the current assets on your balance sheet such as cash, what your customers owe your company (accounts receivable) and inventory. The “Owe” portion of the ratio are the current liabilities such as what your company owes suppliers (accounts payable), credit cards payable, payroll taxes payable, line of credit and so on. Technically it should be anything that you owe in the next 12 months. So to calculate the ratio divide the “Got” by the “Owe” and that gives you the Got – Owe ratio.
How can I explain it?
For every $1 of what you owe, you have (got) $X to pay what you owe.
What does it tell me?
The ratio measures the ability of the company to pay its bills. In general, the higher the ratio the better able the company is to pay its bills. If the ratio is too high it can indicate that the company may want to invest in long-term assets. If it is too low, it can indicate the company may need additional infusion of cash.
What should mine be?
That depends on the type of business you are in. A general range is 2.0, but check with your banker to find out what is the range for your business.
Conclusion
This is one of about a dozen key ratios that you should monitor monthly make sure you understand the health of your business. Keep track of it over several years to be able to track the trend to see if it is improving or declining. And if it is declining, devise a corrective plan and execute it.
The quality of the “Got-Owe” ratio is also affected by the integrity of the individual numbers that are consolidated into the total assets vs. liabilities. For instance: if you show a sizable portion of your assets in receivables then your collection certainty due either to defaults or extended payments changes the absolute number into a discounted number. This is where the other ratios that you referred to come into play and measure the financial health of the business to provide more depth and perspective of the company to withstand financial stress.
Great lesson example and I am sure the less financially educated in your group will look at their business and possibly personal finances in a different light.
Mike Brice
Good point Mike. There are lots of opportunities to get financial transactions coded incorrectly. That’s why successful businesses often have properly trained accounting staff or make use of trusted advisors to “get the numbers right” in both correctly coding transactions explaining the details behind key accounts.
So if I understand your general rule-of-thumb of 2.0, you mean for every $1.oo of “Owe”, I should have $2.00 of “Got.” In other words, I should have twice as much in assets as I owe.
What other ratios or KPI’s are you tracking for the tennis club board?
You are correct that with my example you the “Got” should be $2.00. That won’t be all assets, just cash, amounts due from customers and inventory you sell to customers. What we are looking for is the cash and things that you can convert to cash in a relatively short period so you can pay your bills.
Our tennis club is member-owned and the primary mission is to provide an exceptional and comprehensive tennis experience for our members. To support that mission we focus on generating sufficient cash to maintain the existing assets of the Club after covering regular operating costs. In addition to the Got – Owe ratio, we monitor our cash savings compared to our annual capital budget to make sure we replace equipment as it wears out and maintain the buildings.
We also look at a couple of indicators that provide some insights about member activity. Besides charging members monthly dues we also charge for tennis lessons, fitness center training and other activities. We look at the trend of this additional spending by member. The one forward-looking metric we track is the number of people on the waiting list to join the Club. As a micro-measure of the economy we have seen that number trend down over the past 20 months but we think we are seeing a slight uptick, hopefully like the rest of the economy.
Thanks for the question Berry.