Talking to Management, Part 2: Gleaning Financial Subtleties

A healthy organization tends to have at least 5% turnover. Depending on the industry, a turnover rate between 5% and 15% strikes a good balance between institutional memory and new ideas.

The same logic can apply to suppliers. Long-term relationships are good, but there is value in testing them every now and then to see whether a better deal can be struck in price, quality or other terms.

Repeat customers work the same way. Too low a repeat customer rate means that marketing costs will be relatively high. Too high a repeat customer rate, and the company might be missing out on additional profits from a price increase.

Key Points:

• Analyzing a company's free cash flow can help you steer clear of blowups.
• Find out how a company plans to reinvest that free cash.
• Turnover rate can reveal internal chaos or missed opportunities.

Editor's note: We're pleased to present David Merkel's five-part series on questions to ask the management of a public company. Click here for Part 3, learning about the competition.

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