The Ration Your Family Business Can Run On

The DuPont Formula

The Ratio Your Family Business Can Run On

Every business owner must make sense of complicated and uncertain businesses environment world with numbers, equations, legislation and complex tax regulation.

If you have a family business then you need to understand accounting as well. The numbers in your business is the way your business talks to you.  You need to keep accurate financial records and produce financial statements for reporting taxes – but you also need a simply way to understand how your business is talking to you.

Accounting may be confusing, but what if we told you that there was a universal figure, a simple number that can shed light on how your business is running?

While it may sound too good to be true. There is indeed a number that can provide insight into how efficient your business is running and that number is the result of the DuPont Formula.

What is the DuPont Formula?

The DuPont Formula was developed in 1912 by Donaldson Brown who was employed with the DuPont Company as a salesman at the time. The formula gave businesses a new way to measure the efficiency of a business and is still used by major corporations today.

The theory behind the DuPont Formula is straightforward and revolves around operational balances.

The Operational Balance Sheet

When a family goes into business they create income generating assets that are funded in either one of two ways: by family business owners or by other people.

The basis of the operational balance sheet is that how assets are funded plays no part in how well the assets perform or how they are utilized. For example, if you lease a piece of machinery, the financing of that machine has no effect on how well the machine operates. Only the person operating the machine can determine how well the machine works. This means that the funding is irrelevant and should be included when calculating the DuPont Formula.

There are instances when a business owns assets that are immaterial to the business. In other words, assets that do not generate income for the actual business, such as a holiday home for directors. 

Assets such as these should be ignored and not included when calculating operational efficiency.

Operational Profit & Loss

When trying to figure out the operational efficiency of your business you must look at profits before interest expenses and taxation.

Taxation is irrelevant in the calculation because it plays no role in the efficiency of an asset and is only used by governments to fund revenue.

Also, any income generated by assets not directly connected to the business must be taken out as well. For example, any rental income received from the director’s holiday home should be ignored in the calculation.

Return on Capital Employed

Operational profits divided by operational assets will result in the return on capital employed (ROCE). This single number is a figure that demonstrates how well your business is running monthly.

Your Business’s ROCE

Once you’ve reached this point, you may question what exactly your business’s ROCE should be.

There is no straightforward answer to this question. Industry benchmarking of ROCE can be a challenge to determine. Especially with family owned business, which tend to be secretive with their financial information.

There is an instance in which knowing your ROCE is of the utmost importance. The situation occurs when your family business has developed a product and are focused on altering the way your market views said product. If this applies to you, then knowing your ROCE provides you with a unique strategic advantage.  

Once the ROCE has been identified, it is wise to have the owners of the family business discuss the target ROCE to the CEO of the business. Often, the ROCE will affect how the CEO runs the business.

Final Steps

If after reading this, you find the topic of operational balances and ROCE confusing you should contact us to assist you. We will also provide you with a complimentary copy of a software program that will help you monitor and track the ROCE of your business in real-time.

About Westcourt

Westcourt is a committed bunch of professionals with a singular targeted focus.  In a world where every person is attempting to increase services for an ever increasing range of people they can help: 

Westcourt does the opposite.

We think that a targeted and narrow focus by a small group is the best way to deliver outstanding results.

Our narrow focus has allowed us to deliver a tight culture and innovative service for family owned businesses.  Whether it is in tax law advisory that leverages the unique aspects of a family in a business, understanding your business and financial performance with exact certainty to make you feel safe, or protecting your assets for future generations – Westcourt has the depth of size and targeted focus to make an impact.

So visit www.westcourt.com.au for more details on who we are and how we can help.