Question

Critically discuss the viability of concept in applied in companies on the long run

Answer 1

Viability as a concept applied in companies in the long run

The four attributes for long term successful companies are:

1. Viability

2. Relevance

3. Adaptiveness

4. Durability

There are five components to the to the viability attribute. They are:

1. Margins

2. Turnover

3. Productivity

4. Leverage

5. Cash Position

There are many economic variables in the business that move in the same direction together most of the time.This means that the variables are correlated with each other.One of the primary goals of economic variables of making this effort is to predict future results based on present conditions in the business.Prediction is forecasting and smart forecasters tend to abide by the maxim: Correlation does not necessarily imply causation.

Correlated Variables do not cause each other.There may be one or two that are the root causes of the other correlates. In the search for viability, we can really enhance our odds of success if we can find the critical few variables that do tend to cause viability or, if ignored,almost always insure the opposite.

Viable companies tend to have the following six percentages in their financial statements- five on the income statement and one on the balance sheet.

1. Direct, job chargeable costs do not exceed 55% of total net sales.

2. Cash fixed costs (EBITDA) is equal to or greater than 15% of sales. EBITDA is what's left after all cash costs needed to operate the business have been paid, leaving the money which will be used to service the debt and pay taxes.

3.Cash fixed costs (overhead) do not exceed 30% of total net sales.

4. Free cash flow is around 9% of total net sales. Free cash flow = EBITDA - Interest and principal on debt)

5. Total payroll costs do not exceed 33-35% of total net sales.

6. Cash on hand should exceed 20% of total current assets.

The five components of the viability attribute fall into the following five categories:

1.Managing headcount.

2.The "make vs buy" decision.

3. Purchasing philosophy and practices.

4. Pricing philosophy and practices.

5. Cash conservation disciplines.

These are the root causes of the percentages that manifest themselves in the financial statements of the most viable firms in the industry.They are also intimately intertwined in the other three fundamental characteristics of relevance, adaptiveness and durability.