Crunching the Numbers: How to Calculate MIFROG and Keep Your Business Hopping
Small business owners are always seeking ways to grow their businesses, and one of the critical factors that determine growth is the amount of cash needed to support the business’s operations.
One way to calculate this figure is to use MIFROG. What is MIFROG? MIFROG stands for Maximum Internally Funded Rate of Growth.
Business owners can determine the sustainability of their growth, how fast they can grow without external funding, and identify the ‘levers’ they might pull to fund more growth internally.
The following steps may seem complex, however, they are simple and effective. In future articles, I will give case studies and discuss how the variables might be managed to get better outcomes.
The first step is to add the average ‘days in inventory’ (DII) and average ‘days sales outstanding’ (DSO) in accounts receivable days together to get the number of trade cycle days. Note that in services, work in progress (WIP) is considered inventory.
Trade Cycle = DII + DSO
This number tells the business owner how long it takes to convert inventory into cash and how long it takes to collect payments from customers.
Subtracting the average ‘days payable outstanding’ (DPO) in Accounts Payable days from the result of step 1 gives the business owner the days of investment in working capital, which is the amount of cash that the business needs to keep on hand to fund operations.
Investment in Working Capital = Trade Cycle – DPO
Dividing the result of step 2 by the result of step 1 provides the business owner with the investment in working capital per trade cycle. This number tells the business owner how much cash they need to keep on hand to fund operations in one trade cycle. Multiplying the COGS percentage by the result of step 3 gives the amount of COGS needed to produce $1 in the trade cycle.
COGS in cash needed to produce $1 in sales = Investment in Working Capital/ Trade Cycle x COGS%
Subtracting the net margin percentage from the gross margin percentage gives the overhead cash needed to produce $1 of sales. Multiplying this by 50 percent gives the overhead per $1 of sales as part of the trade cycle. Adding these two numbers together provides the cash needed to generate $1 in sales.
Cash needed to generate $1 in sales = (GM% – NM%) x 50% + COGS in cash needed to produce $1 in sales
Dividing the net margin percentage by the result of step 4 gives the maximum growth rate per trade cycle based on cash generated/cash needed.
Maximum growth per trade cycle = NM%/ Cash needed to generate $1 in sales
Dividing this number by the Trade Cycle gives the maximum growth in 1 day. Multiplying that number by 365 days provides the maximum growth rate per year (MIFROG).
MIFROG = Maximum growth per trade cycle x 365/ Trade Cycle
By using this approach to calculate the maximum internally funded rate of growth, small business owners can determine how much cash they need to keep on hand to fund their business’s operations. They can also determine the maximum rate at which they can grow their business sustainably. This approach enables small business owners to make informed decisions about their business’s growth trajectory, enabling them to plan accordingly and avoid overextending themselves.
Importantly, by understanding the variables that determine MIFROG, business owners can look at how improving these variables can allow them to safely grow faster, and to start thinking about ways of improving.