How to Improve the Return on Net Operating Assets
Return on net operating assets (RNOA) is a measure on how efficient a company is at using assets to generate revenue. A variety of factors determine the course of action required to improve your return, including the type of business, operations structure, equipment/asset utilization, inventory turnaround and time frames from order receipt to order execution. Understanding what your customer wants, how your company deploys assets, production costs and the competitive landscape will provide information needed to make changes that improve the return on net operating assets.
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Instructions
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Calculate your current return on net operating assets. The formula is: Return on Assets equals Revenue minus Expenses divided by Assets. This formula provides an empirical basis from which to evaluate current costs, inventory management systems, receivable collection systems and asset utilization. Once the data are calculated, review the information against known industry standards or historical data.
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Review your cost management system. This will provide information on the cost of raw material, labor and equipment used to manufacture products. Raw material and labor costs are the major operational cost drivers. Determine whether you can lower raw material costs by using different suppliers and/or negotiating better terms. Analyze labor and equipment costs to determine the most efficient use of resources. For example, if your equipment is antiquated and requires more labor to produce a single product, then your labor and equipment capital assets are not efficient.
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Analyze the inventory management system. Inventory management is a key component of your asset base. If your inventory is excessive, determine what the optimal inventory level is, based on customer demands. On the other hand, low inventory levels may be creating inefficiencies, which impedes timely order fulfillment. Determine the industry standards associated with production. Evaluate if your equipment is sized adequately to meet production demands. Also, calculate labor requirements to execute production requirements. These issues affect your receivables and strain cash flow, due to inefficient asset deployment.
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Review accounts receivable collection processes and equipment utilization. If your accounts receivable system is inefficient at collecting debt, assess ways to improve collection times. For example, if your company's terms are too generous, increase or add penalties for late payment, including charging 1 or 2 percent per month for outstanding balances. Create incentives for customers to pay on time. If your equipment is outdated and requires more maintenance or has down time, evaluate the benefit of updating equipment. Down time can cause a bottleneck in the production process, resulting in added labor costs and increased production time frames.
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Scrutinize your equipment and labor utilization. Outdated equipment often lacks production and quality capabilities. Equipment that increases production time, requires more labor or adds processes to complete a product increases cost of goods sold (COGS). Acquiring new equipment can lower labor costs by reducing the number of employees required to operate equipment as well as decrease production time and increase product quality. This will also lower turnaround times, improve customer relations and potentially increase sales.
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Tips & Warnings
Improving production capacity and quality is important to ensuring customer loyalty. When analyzing the acquisition of equipment, evaluate financing versus leasing costs to ensure that you can pay the debt. Speak with customers to determine their needs and concerns.
Make certain you do not change those things that are working and do not take on more debt unless the company is able to afford the financing costs. Also, ensure that the equipment is sized to your business and that the manufacturing company provides educational training on new equipment.
