Financial Statement and Sales Analysis Management Tools

Process Power

2013-12-20T05:39:00.000-05:00

The lack of effective process is usually not the reason why business fail. But it is the reason why business do not excel. We often consider the constraints to excellence are the traditional lack of money, lack of customers and the usual "dog ate my homework" stuff. Not that these do not impact performance but often may be the symptom not the cause.

The problem with process be it in big and small business is that it is usually considered to be another form of rule, another way that disengages creativity and free spirited behavior. It is the proverbial root canal to achieving anything around here.

That been said how can we promote the "process power" aspect to this scenario.

Well there has to be a story about everything. For some of our followers you know we mostly write about things that happen in the field.

John is a real go getter his business unit has recently been separated from the mother ship and now face the daunting task of having to do everything for themselves. John shoots first then has a quick look to see the damage done and moves on to the next target. Brian on the other hand is a team member who does things a little different. He measures twice sometimes three times before he "cuts".

John sales are extraordinary with a top line that reaches the tallest cloud. Brian sales are good but no one can be a John when it comes to sales. There are many other characters in this saga but for the sake of not overextending my limited typing skills we will stay with John and Brain.

Like with all fairy tales the story has to have a twist. I think most of you by now know where this is going. John perfect top line does not always translate in a pretty bottom line. When it comes to executing these sales something inevitably goes wrong. John has ordered the wrong materials (which he is not supposed to do in the first place), the sub contracting crew bring the wrong equipment, and the stuff hits the fan one thing after the next. Brian lands up having to fix things with a fire extinguisher that is bigger than the truck that he drives. Brian turns on the fire hose before he brushes his teeth in the morning.

Its not there is no process in fact the process are reasonably well established. What happened or happening behind the scenes:

There was no process buy in
Processes established in many instances were cumbersome

Process adherence were considered by some a great thing as long as it is someone else job.

The big gig is the process buy in. It is amazing in that it fixes pretty much every thing else.

Conducing a PROCESS SNAP SHOT meetings that are short (no longer than a hour) targeted at specific activities are a great way to gain buy in especially if you have a bunch of ADD (Attention Deficit Disorder we often refer it to PDD Process Deficit Disorder) people in the group.

The secret to these snap shot meetings is to present the WHY. The traditional approach is to explain the process and what people have to do to adhere.

Starting with the why provides the ability to people to participate in the solution. In John case the why was formulated based on making the customer happy. To do so each job required the right people based on the job complexity, the right equipment and all the materials required to perform. Most simple when you are only doing one job when you have to do this with hundreds of jobs the simple becomes complex.

The snap shot meeting need not try to resolve all the issues but it must be focused on at least one key activity. In johns case the activity could be materials acquisition. The secret is to present alternative ways of doing things before the current or required process is reinforced.

John could be the person that does the ordering however this would mean that he would have to ensure that the items are delivered at the right place in the right quantities with the components in place.

Demonstrating how this would impact John life may change the way that John feels about what needs to be done opening the door to gain the buy in on what the right way should be.

I know that after reading this may think that it seems so obvious but the reality is that so few organizations focus on effective process. Fewer revise and review process effectiveness on an ongoing basis.

Please make the snap shot meeting part of your agenda within other meetings that you hold. By focusing on one activity you good outcomes in short periods of time.

By Andre Gien

Andre and his team provide business improvement programs using your financial statements as the foundation for discovery and opportunity identification.

We deliver business performance as measured in your financial statements that improve profit cash and returns. Linking strategy, people and process to financial statement outcomes.

Financial Statement and Sales Analysis Management Tools: The Art of Discovery

2013-12-03T14:11:00.001-05:00

Financial Statement and Sales Analysis Management Tools: The Art of Discovery

The Art of Discovery

2013-11-28T16:56:00.000-05:00

Good discovery produces better opportunities. The ability to define the root cause is an art that is not widely taught or even promoted.

When we have a precisely defined problem, solving it is easy. When the problem is more complex we frequently only tackle the symptoms and not the root cause.

Sales performance at one of our clients was stable but not growing. Their solution to stimulate increased sales was an elaborate loyalty program with a substantial rebate attached based on volume purchases. Volume growth occurred but was relatively small. A negative consequence was the rebate system created significant margin destruction.

They had worked on the wrong problem or symptom of a more deeply hidden issue. This business has a deep product range and most of their customers buy a portfolio of these products. The real problem was they were missing the opportunity to cross sell- their performance was anemic- only 10% of the top customer base bought more than 5 different products.

Now how easy is this to solve. Once this was understood the sales teams promoted more of their range and increased revenues without destructive rebates.

Our research shows less than 10% of medium sized business (between $10m and $500M) have some form of discovery culture in place, such as a six sigma problem solving methodology. The interesting fact is that they mainly focus on problems. We only found 1 instance where discovery was focused both on problems and successes.

Why do we not consider success to be a focal part of our discovery process? I was participating in a "lost contract review meeting" that analyzed in depth the reasons for the loss. After the meeting I asked if I could participate in the "win contract review meeting" . I will leave the answer to your imagination.

Mostly we have a belief system that successes will continue on their own and we default to solving problems (or more commonly their symptoms).

Consider the discovery culture in your organization.

How is discovery encouraged
Do you have effective discovery tools in place
Are your teams working on root causes or are they addressing symptoms
Do you try and learn from and propagate your successes
Do the same problems recur (a sign you are working on symptoms)

5 Chapters to the Financial Statement Story

2013-11-21T16:57:00.001-05:00

Looking for an easy, fast yet powerful way to explain your performance using your financial statements? The 5 chapters could be the way to go

People prefer the story to the clinical number this number that. Yes there is a story and as you will see each chapter is dependent and linked to the other chapter so you have to cover all the chapters to get the full picture.

The 5 chapters to your story integrates the impact of the income statement and the balance sheet in a way that all people can easily understand, engaging discovery that creates opportunity to improve profit cash and returns

For the sake of simplicity we refer to the income statement as the way you make money. The balance sheet is referred to the way you create wealth.

The 5 chapters integrate the way we make money with the way we create wealth establishing how we ultimately drive sustainable value.

Chapter 1 is all about how effectively we grow revenue, usually measured as a growth %.

Chapter 2 reflects on how we translate growth into superior profitability measured as the amount of profit derived from each revenue $

Chapter 3 now connects the balance sheet with specific focus on working capital, measured by adding receivables plus inventories and or work in progress less payables. The sum of these gives us the total working capital at the measurement date. Working capital is divided into revenue to attain what we call working capital per $ of revenue. This is the amount of working capital required to fund each revenue $.

Note: The connection between chapter 2 and 3, they are both based on the revenue $ allowing powerful insight as to how revenue influences both the income statement and the balance sheet.

Chapter 4 is all about the King. Correct cash is King which is the OUTCOME of the previous 3 chapters. Thus Cash = have we converted our growth into superior profitability combined with the rigor of sound working capital management (Cash = Chapter 1=2=3)

Chapter 5 is the value creation measure called ROCE or Return on Capital Employed we will do some more work on this measure later. In essence all we are looking for is the ability to improve the profit contribution per $ invested in the business. ROCE = Chapter 1+2+3+4

Now we are in a position to tell our story. We grew our revenue by 23%, resulting in a decline in our profit contribution from 12 cents in the revenue $ to 11 cents. In addition our working capital absorption rate increased from 14 cents to 18 cents per revenue $ producing an operating cash flow of $208.

{If you wish please comment on the operating cash flow, as a manager would the outcome of $208 be acceptable and why. As a hint compare operating profit to operating cash}

This leads us to question the quality of our revenue growth.

Think of the wealth of discovery that can result from this story. Ranging from what created the growth to how profitable was that growth, to how are the new customers behaving in relation to our existing customers and so on. The discovery considerations are endless.

With good discovery we often gain insight to powerful opportunities that can lead to profit cash and return improvement.

Hopefully the 5 chapters provide a different way to use your financial statements to tell your story. We find this process very effective with our clients in that its takes the accounting out or the financials and makes it more oriented to how we think about our business. Our clients love the story embellishing the case and effect often leading to some very innovative solutions.

2013-09-10T20:53:00.001-04:00

Using financial statements to create commercial customer loyalty

What makes a good business customer....

"A customer with a set of financial statements that delivers no unpleasant surprises"

Quote from a seasoned banker

Financial statements are a common bond between the banker and her business customers. Good quality numbers provides the banker with opportunity, yet very few banks use financial statements to their advantage.

Helping business transform their financial statements into a powerful business tool can only be a win win for all.

It is common knowledge that most small to medium sized business owners have limited knowledge as to how financial statements can be used to improve performance and reduce risk.

This knowledge gap represents an excellent opportunity for banks to fill the void and build communities of interest around the bank brand.

What if the banker took a very different approach? Instead of only using financial statements as part of the due diligence process. Convert these documents into a marketing tool.

If the bank can provide business with an effective and easy way to analyze their financial statements that can help to improve profit, cash and returns, which business would not think that to be valuable?

Our solution is to combine knowledge with technology creating a community of interest for the bank customers.

Our system allows the banker to deliver at no cost to the customer or prospect, a branded version of our financial statement analysis and “what if” software. The system resides on the customer’s desktop/laptop thus eliminating any security issues.

Our interactive analysis tool will allow your customers to analyze their financial statements, measuring the impact of strategies on growth, profit and cash flow.

For more information on how you can use financial statements to differentiate your banks value offer please contact

Andre Gien Agien@gfbridge.com /925-323-2802

Josh Lloyd Jlloyd@gfbridge.com /970-264-1367

or toll free 888-755-5378

View how financial statements are used to engage customers

Financial Statement performance videos

2012-09-21T15:34:00.000-04:00

Financial Statement Story

The methodology used in this video supported by the key conservation topics listed below provide a guide for both the business manager and the internal business advisor to communicate how past and future strategies have impacted current and future financial performance.

One Page Communication Platform

1. Measure how effective you are at converting decisions and actions into financial performance

2. Convert all the various financial statement documents into a One Page interactive Scorecard

3. Do any form of "what if" .... KNOW BEFORE YOU DECIDE.

a. What if we grow will this create more or less cash

b. What if we add additional products or services will this improve our profit and cash to the point where the reward exceeds the risk

c. What if we increase our staffing levels how much additional revenue do we need to do this

d. What if we improve our supply chain will the benefit exceed the cost of doing it.

e. What if we increase our marking spend how much additional revenue and cash do we need to make it happen.

f. What if... create your own circumstance and GFB will measure the result

4. Deliver the critical performance measures to your team that are aligned to the required financial statement performance

5. Guides management as to what should be focused on.

6. Quantifies where the inefficiencies are. "What's fat and what not"

7. Automates the whole budget process producing the projected income statement, balance sheet and cash flow for one or multiple future periods.

8. Stress test future strategies and modify any budgeted period which strategic changes.

9. Deliver future assumptions that guide management performance

10. Produce historical and future financial reports

11. Create user defined performance measures that are applicable to your business model.

12. Provides a powerful way to deliver your performance in board meetings, senior management meetings and strategic planning meetings.

Other good to know stuff

1. Imports directly from Quick Books® and excel

2. Inquire about our 20 week video course on how to create the financial statement performance discipline

3. Cost $600.00 per annum for the software management tool

4. Training is $600.00 for a 2 x session in person web delivered course (each session is about 2 hours)

5. Total online help video system

Please let us know how we can power your intuition with the rigor of evidence

Superior Financial performance

http://youtu.be/Ng498wKHSFw

Financial statements are the only business measurement system. How effective you are at using these documents to guide you towards doing the right things, can be the difference between failure or great results.

Return on Capital Employed

http://youtu.be/k_y0Sf5U0u8

The ROCE story creating performance based financial statements

How Return On Capital Employed (ROCE) can be a great way use your financial statements to evaluate how business outcome impact the ability to create wealth.

Creating Superior Profitability

http://youtu.be/owB4pUPym3g

Here we only focused on the income statement and how can instantly identify dysfunction between Vanity and Sanity. We will leave the interests of King for another day.

Vanity is REVEUNE, Sanity is PROFIT and CASH is King

We take a standard income statement and balance sheet actually about 30 numbers and convert them into an interactive one page financial scorecard.

Are we cash absorbing when we grow our business

http://youtu.be/KkW47BEueGs

Does your business absorb or generate cash when you grow

You are presented with a standard set of financials which contains the answer... so what is it. Well that the problem it's not easy to know let's see how we can instantly identify the answer in the One Page Financial Scorecard

Gain insight into as to how the combination of income statement and balance sheet management techniques work to answer this question

Good debt vs Bad debt -Considering how to formulate a corporate debt policy.mp4

http://youtu.be/JoUeFKTWHtg

Do we have good or bad debt

You must agree this is an interesting question... we think a lot about it but very seldom seek an answer.

Can debt be good and what is the conditions precedent for this to be the case?

Let's use Global Financial Bridge www.gfbridge.com to see if there is an easy way to reveal the secrets between good and bad debt.

As a starter what is our strategy when dealing with how much debt we should or should not have... I will provide a prospective the end of the video

Financial statement communication and analysis

http://youtu.be/7OmgP4TBaqo

Using the one page scorecard to integrate the income statement and balance sheet with the 5key focus areas of growth, profitability, balance sheet management, cash and returns

Projecting the future

Measuring financial statements budgets and projections against profitability, cash and return on capital. Enabling the identification of where future value will be created using Global Financial Bridge www.gfbridge.com

http://youtu.be/S0DuCQx606I

Good Growth Part 2

http://youtu.be/Eo5uNVcZpRY

How growth can create or destroy value

A Company’s Financial Statements Tell an Important Story … Can Management Successfully Communicate That Story?

2012-09-03T10:04:00.001-04:00

I. Introduction

The Key to a Company’s Survival … Sustainable Free Cash Flow & The Discipline of Financial Performance

At this time, company management is asking itself the obvious critical question: “what can we do going forward to maximize the company’s ability to weather this downturn and to thrive in better times?” The not-so-obvious answer to this question is that the company should focus on achieving sustainable free cash flow. A company can achieve sustainable free cash flow if it commits to and properly executes the discipline of financial performance (explained below).

Sustainable Free Cash Flow To Satisfy Banks’ Heightened Lending Standards

A company’s survival, let alone success, is tied largely to the ability to manage cash flow. No doubt this axiom will be tested and reproved in spades as the current global financial and economic maelstrom runs its course. Arguably, companies have a greater ability to increase cash flow from operations than they do from financing activities. A company can, for example, take action to collect accounts receivable and improve inventory turnover (operations), but companies cannot force banks to loan money (financing).

II. The Discipline of Financial Performance

A Company’s Performance Gap (Gross Potential – Current Performance)

“Gross potential” is a financial metric that can derived by management effectively communicating a company’s leading indicators or core competencies (read: how well a company can do). A powerful example of a core competency which is often neglected is what we call “common knowledge” which is founded on the principal that knowledge is power but if critical business knowledge is housed within select organizational functions automatically restricts the “knowledge power”. This common knowledge can be segmented into

Business strategy knowledge
Process knowledge
Information access capabilities
Policy knowledge
Measurement and expectation knowledge
Financial performance knowledge.

The greater the degree of common knowledge throughout the organization the more effective the business is in getting things done the right way. Creating a systemic way to maximize common knowledge is a critical foundation to all core competency development or enhancement and thus reducing the “blind spot risk”.

(Note: The process for management’s communication of financial statements is discussed below.) Financial statements, however, are a lagging indicator of a company’s current performance (read: how well a company is doing). They essentially paint a backward-looking picture based on a company’s financial and operating performance during the most recent fiscal period. The “performance gap” represents the difference between a company’s gross potential and its current performance.

The Root Causes of the Performance Gap: A Company’s Organizational Blind Spot & Absence of Standardization in Financial Statement Analysis and Interpretation

The performance gap is attributable largely to a company’s organizational blind spot. This organizational blind sport is rooted in the common practice (in many companies) of allocating management responsibilities among several individuals. As a result, more often than not, senior managers:

· cannot understand, individually, in any transparent manner how each of a company’s individual operational segments impact on the company’s aggregate financial and operational performance, and

· do not have a clear understanding of how a company’s financial statements (i.e., balance sheet, income statement and statement of cash flows) interrelate with and impact on one another.

There is no standardized way to analyze and interpret a company’s financial statements to communicate the company’s gross potential. The absence of standardized financial communication tools, in turn, has, among other things, two notable adverse effects on a company:

· it compounds the challenges of a company’s organizational blind spot fundamentally; and

· it impairs management’s ability to gauge a company’s performance gap and to therefore develop and implement strategies (that would increase its profitability, cash flow and return on investment) to achieve financial performance.

To this point, in identifying a company’s organizational blind spot and performance gap we have (so-to-speak) diagnosed the problem. Now we must now turn to the all-important next step – the solution – the roadmap for company management to overcome the organization blind spot and to achieve the company’s gross potential.

III. The Discipline (of Financial Performance) to Achieve Gross Potential

Interactive Real-Time Financial Management Communication – The Performance Gap Cure

At its core, the discipline of financial performance is about two things:

· a powerful organizational learning platform that connects management to the company’s financial statements; and

· company management (via this platform and connection) interactively and in real-time communicating the company’s financial statements to make optimal business and operational decisions.

In order to be effective, this organizational learning platform must include the following fundamental components:

· relevance – people connect to learning that will enhance their ability to perform and their career;

· real-time feedback – instantaneous feedback on potential strategic decisions;

· interactivity – simulation of hypothetical scenarios without consequences, which promotes creativity and innovation;

· simplicity – delivery of complex material and information easily understandable format;

· familiarity – personalization through the use of a company’s current financial information.

The interactive and real-time communication of the company’s financial statements will, for example, significantly improve management’s ability to evaluate whether a strategic decision to create or destroy cash or reduce corporate waste.

Global Financial Bridge, LLC and the One-Page Scorecard

Global Financial Bridge, LLC has created such a platform in the form of a one-page scorecard (illustrated below), which among other things:

· transforms a company’s standard financial statements into an integrated environment, and communicates all of the financial statement components in a single platform;

· provides for interactivity and real-time feedback through calculation and analysis of robust what-if scenarios and stress testing capabilities; and

· incorporates a net change capability that isolates the financial impact of a strategic alternatives (or alternatives) and illustrates simply how the income statement, balance sheet and cash statement changed and what the drivers created the change.

In our experience, those companies that have truly committed to and properly executed the discipline of financial performance have overcome successfully their respective organizational blind spots and performance gaps and achieved their gross potential.

2012-09-02T08:51:00.003-04:00

Vendor payment period

The last of the working capital trio. How to calculate your accounts payable days or vendor days outstanding

We take the amount we owe to our vendors at the end of the period and divide it by the COGS (including the direct shipment COGS)[i]. We then multiply the result with the trading days represented in the total COGS.

Accounts payable or vendor days outstanding are useful when wanting to compare your inventory holding with how quickly you pay your vendors. If you not taking settlement discount, your payable days should exceed your inventory days.

[i] Remember when we calculate inventory days we exclude direct shipment COGS from our inventory

Show me a business that

2012-08-29T18:00:00.002-04:00

Show me a business that deploys sound financial statement disciplines and I will show you a business that outperforms any of its peers.

Yes you heard right, financial statements and performance go together.

The secret is how these financial statements are used to drive performance. If deployed in the right way financial statement create the guiding light called FOCUS. We call this the Financial Performance Discipline. (FPD).

Your financial statement are a powerful competitive weapon if used in the right way. The Financial Performance Discipline (FPD) combines structure, methodology and technology that ensures organizational focus on the right thing.

This may sound a like a big job with a high price tag, actually it requires one hour a month, and 3 hours a quarter and can be installed and fully operational for $1,200. (includes the financial statement management software plus the training to get you up and running). The FPD is integrated as part of your management meeting and best of all it is driven by you.

The Financial Performance Discipline will guide you from "how well you are doing" to "how well you can do". Creating a performance culture that:

Is measured and accountable
Developed around 5 focus areas
Structured and disciplined
Makes strategy aligned with financial outcomes.
Integrates and forces ALL key manages to make decision that positively influence the income statement, the balance sheet and the cash statement

The FPD is not the domain of the CFO or the controller it is a management system that impacts and influences all key managers in the business. THE FPD ensures all managers are aligned with the right financial outcomes.

If you are prepared to commit 3 hours of training and installation to transform your business based on measured accountability

Please Contact agien@gfbridge.com 925 323 2802

Using common knowledge to manage risk

2012-08-28T08:37:00.000-04:00

The power of knowledge is well known to all of us. How we distribute knowledge within our business can be a very efficient way of managing risk. If critical business knowledge is housed within different organizational functions without a conscious way of sharing the knowledge creates these “knowledge power” islands within the business.

He or she who has the knowledge, has the power and how this power is used can be for the good or be most harmful. Information technology departments often use this knowledge power to their advantage either unconsciously or other wise to dictate what will be done or wont be done whether it is for the common good or not.

Another example of knowledge power may be found in the finance department. The knowledge of how certain decisions impact both the income statement and the balance sheet can significantly change the decision. Often these core concepts are not shared with significant consequences that could have quiet easily have been prevented in the first place.

This might be a good time to introduce the "blind spot" which can be defined as knowledge know by some, but not by others.

The blind spot will always be there but how well we create an environment for common knowledge to manifest itself will be an important factor in reducing the blind spot risk.

in order to do your common knowledge audit. Please consider how each of these business systems empower knowledge sharing.

• Business strategy knowledge

• Process knowledge

• Information access capabilities

• Policy knowledge

• Measurement and expectation knowledge

• Financial performance knowledge.

The greater the degree of common knowledge throughout the organization the more effective the business is in getting things done the right way.

Financial performance manager - myth or reality

2012-08-27T21:33:00.002-04:00

Financial performance manager - myth or reality

Perception is often the reality. The CFO of yesterday was required to measure , report and control HOW WELL WE ARE DOING. The CFO of tomorrow is about HOW WELL WE CAN DO. Then problem is that many organizations manifest the yesterday culture even irrespective of how the incumbent CFO wants "to do things around here"

The difference between how well we are doing and how well we can we can do can be described as the organizational performance gap. For the purposes of this discussion let call how well we can do as the organizational GROSS POTENTIAL. It would then be the job of the performance manger to identify the performance gap and move the business towards the gross potential.

We are now faced with the potential dilemma to create a methodology of defining the gross potential. One way that this could be done is by defining what are the required core competencies required to drive superior competitive capabilities.

These core competencies are or completive capabilities can be segmented based on the respective business model. In general examples of these core competencies could include.

Customer core competencies that in turn would divided into customer growth capabilities and existing customer growth and management capabilities.

Value offer core capabilities represented by those capabilities to create superior value to the targeted customer. Once again the subdivision between existing value offers be they products or services or a combination of both and the development of new value offers.

Channel core competencies reflecting those capabilities to develop and maintain effective access channels to serve the targeted customer

Strategic relationship core competencies which enhance the capabilities to compete effectively

Business process, technology and policy capabilities
Learning and growth core capabilities required to develop employees and the tools they use.

In the heart of these capabilities would be how they influence and impact financial performance.

Gross potential would thus be the sum of the what these capabilities should be. The performance gap would be the differential between the current state and the desired state.

The job of the performance manager becomes somewhat more systematic. She would target the those capabilities with the largest gap.

Your job until we meet again is to identify your performance manager , empower him or her and attain a clear definition of your required core competitive capabilities.

2012-08-27T20:17:00.003-04:00

The GFB service

For those entities that require a fully integrated performance management system. GFB engages with companies transforming financial management into the financial performance management discipline (FPD).

FPD is cultural it becomes the way that we do business, core competencies aligned with how that impacts our financial statements just makes sense

Doug Meyer-Cuno President Carolina Ingredients

Our process starts with the ability to quantify gross potential. The first target is to close the performance gap between the gross potential and current performance. Our finding are that this is where immediate value is created.

The process is initiated using the financial statements as the “lagging indicator”. The performance workshop identifies the gross potential. Using the skills of the key functional executives the gross potential is translated into those core capabilities that are required to achieve the closure of the performance gap.

The accountably to these core competencies become the ownership of the of the performance team.

90 day Performance milestones are built linking the lagging indicator (financial statements) to the gross potential through the established core competencies that will deliver the result. This makes the process very measurable removing all the esoteric fluff.

At the end of the day if it can’t be measured in the financial statements then it does not relate to what we do at GFB.

When is the GFB service value creative?

Require all managers to be aligned with the why, then the what and lastly the how
Need to have educated managers in how the income statement balance sheet and cash flow work together to create or destroy value
What to sell your business...one day (inquire about our investor ready program)
Want to create sustainable cash flow

Want to migrate from financial management to financial performance management
Want to have a business model that is simple, accountable and focused on the numbers.

Process

Step 1- Business Diagnostic

Step 2 -Performance Workshop

Step 3-Alignment program

Step 4- Accountability discipline

Investment

$2000 per month includes the GFB Financial statement analysis technology

Commitment

Minimum 6 months

Sales analysis methods for the distributor

2012-08-26T10:00:00.002-04:00

Unit Price Audit

Consistent unit price auditing is critical to driving improved margins. Our ERP (accounting systems) systems will have a price that we would like our salespeople to adhere to. The reality is that often this price is overridden or changed.

Managing unit price fluctuations can have many benefits

1. Are we selling the same product to the same customer or customer group at different prices? (yes I have seen that happen)

2. Are we lowering prices to the right customers? I have witnessed small low volume customers with lower prices that the good A grade customers

3. Which salespeople are capable or maintaining the right selling prices.

4. Which customer groups or market segments are less price sensitive and are we growing in these segments or are we declining.

Unit price audit video

The audit steps are:

Step 1. Products by Period - Identify high volume products. Your sales analytics show all customers that have purchased this product

Step 2. Customers by period for the selected high volume product- Westgh SPC price

Step 3 – Select the selling price for this product for all customers

Sort best selling price to worst selling price. Observe the wide price range, certain customers are charged a prices far greater than others. you may be surprised that these high priced customers do not fall in the "D" category and yet some of the customers that should be charged higher prices are not.

Step 4 – Sort worst selling price to best selling price …. Are these the right customers that should be receiving the best prices?

The sales analysis by product price shows all the customers that are attaining pricing preference. The check here is to determine if these are the right customers that should be receiving the lower price.

Step 5 – Define the market segments and how the prices vary between the market segments.

Can we grow the cooling segment?

This is where good sales analysis capabilities can be most effective. The individual product is summarised into the various markets that it is sold into based on the average selling price attained within each market segment. If our goal is to optimize the price of a specific product the market segment analytics informs us where the best average unit selling price is achieved. The next step would be to identify the tactics that can allow the growth in that market segment.

Unit selling price analysis is one of the many ways we can create good growth in the distribution business without actual price increases. That does not mean that price increases is not an appropriate strategy. We will be talking about where are the best opportunities to increase price.

You comments and experiences would be most appreciated.

How much cash would that sale require

2012-08-12T13:20:00.001-04:00

Working Capital Per $ of Sales

Have you ever been in a situation where you need to know the cash impact of a new customer, or an additional product range from a new supplier, or for that matter how a bid would create cash.

Working capital per $ of revenue could be most helpful in these cases.

Step 1 Calculate your average working capital per $ of revenue (WC/$) (see example below)

Step 2 Multiply your revenue with the (WC/$), adjust for the time period if less than a year. = Total working capital retention at the end of the period

Step 3 = Take your gross profit contribution and deduct your working capital requirement this is the cash impact due to the transaction as at the end of the period.

Hope this helps

Working Capital per $ of revenue	20.55	(j) = (g/ixh)/a)*100
Working capital (adjusted for the revenue period divided by revenue x 100)
Sales/Revenue	3,000,000	(a)
COGS	2,500,000	(b)
Gross profit	500,000	(c )
Gross profit %	17%
			Days
Accounts receivable	600,000	(d)	36
Inventory	840,000	( e)	60
Accounts payable	190,000	(f)	14
Working Capital	1,250,000	(g)= (d+e-f)
Working Capital per $ sales	20.55

Days in period	180	(h)
Days in year	365	(i)

Per the above example

Revenue (sales)	3,000,000
Working Capital per $ revenue	20.55
Required working capital	1,250,000
Profit contribution	500,000
Cash required to fund first 180 days	750,000

Days Inventory - Your Financial Statement Analysis Tool

2012-07-20T13:33:00.001-04:00

Inventory day’s calculation
An easy way to calculate the average inventory holding for a particular product or group of products.

Inventory value /COGS X Days reflected in the GOGS amount

A small test to give your people based on the above. If revenue of a particular SKU grows by 10% and the days inventory says the same will the inventory $ holding remain the same, decline or increase. Also what would the cash consequence be.

Have a great day

Converting Your Financial Statements into a Treasure Map!

2012-07-09T10:08:00.000-04:00

Introduction

This paper is about a compelling story leading to the discovery and retrieval of buried treasure. The fascinating thing is that this treasure is buried within your own company. It lies there in the form of hidden costs, wasted cash and seemingly attractive revenues bolstered with high levels of working capital. This treasure is not being mined for two reasons. First, it is invisible to most people and by default no-one is working on it. Secondly, the few that have an inkling it exists can’t rally the rest of their organization to go after it in a concerted way.

All companies, private and public, have to prepare a set of financial statements. These statements are complicated and were never designed to be a communication tool. You may be surprised to learn that few executives outside of the Chief Financial Officer truly understand them. In fact, we asked a group of billionaires attending a conference at MIT to calculate the cash flow statement from the other two elements of the financial statements (the income statement and the balance sheet). Only 1 of 30 got it right!

This paper will allow you to interpret the financial story in 5 readily mastered chapters. Armed with this understanding you will be able to interpret the fundamentals of your own or any other business as well as the Oracle of Omaha, Warren Buffet.

As an executive or employee you will be able to use your financial statements as a means to enroll your entire organization in achieving higher levels of performance. Instead of the numbers being a story you spin, they become the story in which everyone participates.

We will then turn our attention to converting the financial statements into a One Page Scorecard. Literally, they will be transformed from a mostly indecipherable set of numbers into a compelling and easy to read treasure map. This map will identify areas where your business is losing or wasting money and divert it to areas where you can maximize the best financial returns.

Together the map and the story engage the entire organization linking your strategy through to improved operational and financial performance. The financials are no longer a set of lagging indicators. They become a powerful interactive communication vehicle linked to core competencies within your enterprise. The net result is your employees know what actions to take on a daily basis to deliver the maximum potential.

The Power of Story

For many millennia human beings have conveyed complex ideas through the power of stories told around the campfire.

A belief is not an idea that you possess;

It is an idea that possesses you.

A great idea compels you and others to take action. Consider the following quote by E M Forster:

Fact: The Queen died. The King died.

Story: The Queen died. The King died of a broken heart.

There is much more drama and emotion in the same facts when woven into a story. When you can link your ideas into a powerful story you can move hearts, minds and even organizations.

As Alan Kay HP Exec and founder of Xerox Parc once said:

“Scratch the surface in a typical boardroom and we’re all just cavemen with briefcases, hungry for a wise person to tell us stories”

All companies need to file their financial statements. They are the ultimate arbiter of performance. They represent all decisions and activities over the prior reporting period. Companies invent all kinds of additional scorecards such as the Balanced Scorecard mainly because the financial statements are too difficult to read!

Here we show how the statements can be converted into a story that creates an emotional experience that will ultimately galvanize a greater number of your employees to make better decisions that improve long term financial performance.

Meet the Characters – Revenue is Vanity, Profit is Sanity & Cash is King!

Every good story has characters the audience can identify with. The financial story usually has three, Vanity, Sanity and King. Take a moment to consider our three characters and think about which one is in control at your company

The first of our trio is an ebullient fellow. Full of confidence and bluster, the eternal optimist, known as Vanity. He represents the sales revenues of the company. He believes that if he is given the right resources and enough authority he can win any deal, dominate any market and double the sales of the company. In fact he often believes the company doesn’t really understand his importance and if the company were just to get out of his way he could take the company to great heights. His answer to any financial difficulties is to invest in him and his team and they will sell their way out of it.

The second member is Sanity. He is all about the bottom line. For him the ultimate goal is the best profitability for the company. No nonsense for him, he sees the world in black and white and hates being in the red.

The third member has the grandest title, that of King. He doesn’t rule the empire but he is very protective of the empires cash. He hates paying out cash and will lovingly count and hoard any cash he receives. You will need to have a very persuasive argument if you want him to fund any of your pet projects!

The Oracle of Omaha, Warren Buffet has paid special attention to these characters:

“One of the things you will find – which is interesting and people don’t think of it enough – with most businesses and with most individuals, is life tends to snap you at the weakest link. The two biggest weak links in my experience: I’ve seen more people fail because of liquor and leverage – leverage being borrowed money”.

Jack Welch has the following advice:

“Number 1, Cash is king. Number 2, Communicate. Number 3, Buy or bury the competition.”

We assert that all three characters need to play a balanced role in order to generate enough wealth to have the ability to buy or bury your competitors.

Our fundamental conviction is cash matters.

Companies exist to create value for their owners. This enables them to attract additional investment in their company (equity capital) to fund its growth. Without this investment companies ultimately stagnate or perish to more aggressive competitors.

Investors invest with cash and expect superior cash returns. Most companies place too much reliance on performance using the singular lens of profitability. They are infatuated with growth at all costs. As we shall see revenue growth quality can determine whether cash is consumed or released.

Successful companies manage both the income statement and the balance sheet. They have learned how to effectively make money by using other people’s money (return on Capital Employed).

The 5 Chapters of Your Financial Story

You can communicate the story of your business in 5 easy to digest chapters:

Growth Quality

Did the sales achieved by Vanity create superior financial performance? If Vanity was given more cash by the King could we have achieved higher growth?

Profitability Performance

Does Sanity believe Vanity’s deals represent good growth? Did they enhance or erode margin? Did they help strengthen our brand in the market or does Sanity think we discounted unnecessarily in order to win the business?

Working Capital & Fixed Capital Utilization

Did we have to fund Vanity’s success with additional working capital-did we need to hold higher inventories for example in order to guarantee timely deliveries; did we need to build an extra production line or put on a weekend shift to meet these needs?

Cash flow management

The King not only counts the cash at the end of the year, he needs to make sure the business has enough to pay monthly salaries, your suppliers, the bank and others lending you money. Is your cashflow sustainable and is it predictable so that the King will not be surprised and have to run to the bank to borrow at an unnecessarily high interest rate.

Return on Investment

The ultimate question which Vanity, Sanity and King are held accountable for. Did they make money from other people’s money? The company either borrowed money from their shareholders (this is known as equity) or banks (this is known as debt). If we borrow at say a 6% rate of interest and we make 5% return—not good! If we made a 18% return it means for every dollar we borrowed we got three in return—sweet!

It is important to understand that these are story elements and influence each other. It is sometimes hard to fathom how the income statement and the balance sheet interact with the statement of cash flows.

In our story it is easier to understand that Chapter 2, Profitability, and our character Sanity, is influenced by the quality of the work undertaken by Vanity in Chapter 1. The combination of the first two chapters manifests in the working capital aspects of Chapter 3. The activities of both Vanity and Sanity plus the working capital needs determine whether the King is happy with his cash in Chapter 4. The last Chapter looks at the combined efforts of our three principals and tells us not only are we making money from other peoples money, but how much risk are we taking on in doing so. For example, if we are borrowing at an average cost of debt of 6% and we make 18% return we can see that this is a lower risk than borrowing at 6% and only getting say 10% in return.

Warren Buffett looks at this risk in this way:

“There is a huge difference between the business that grows and requires lots of capital and the business that grows and doesn’t require capital.”

Creating the Treasure Map and the Compass

In the following illustration we have taken the standard financial statements of a company with revenues of $3.7billion and depicted them on the left hand side. On the right hand side we have recast the same numbers but within our story context and the 5 chapters. This acts as a compass giving us directions in which to sail to discover more about our opportunities. As we look at the chapters the story emerges and reveals areas of opportunity, the hidden treasure locked in the business.

Few people can take the left hand side and draw meaningful insight. However, the right hand side tells a story and gives us clues we can explore. We easily see that Vanity has been very busy. He had a revenue growth challenge of 15% and has handily come in over budget.

Sanity is feeling a little mystified. Vanity has been celebrating in the board room and all of his sales team has gone for a week to the beach in Cabo St Lucas for meeting their 100% sales club target.

Sanity is concerned that profitability (expressed as EBIT or Earnings Before Interest and Tax) as a percentage is less than the year before. Consider, if we had just got the overall profit number from the income statement of $450 million, which was better than the $400million the previous year, Vanity’s celebrations would have not been in question.

The King is beside himself with worry. He’s scratching his head wondering how the net cash flow is a negative $270million! He wasn’t expecting that, hadn’t planned for it and is not altogether clear how it happened. So we grew by 23.3% and cash is leaving the business???

The compass has given us pointers—let’s go on a treasure hunt!!

Chapter 1: The Growth Quality Story

Revenue growth or depletion has a story quality in of itself. It can be anything from a greek tragedy through the Heroes Journey where all manner of obstacles and dragons have been slayed for Vanity to ultimately make the numbers.

Revenues can be grown in three ways:

by increasing the number of sales made
receiving higher prices for those products and services that have been sold
by acquiring new companies or products/services

We will ignore acquisitions in this treatment. We see from Chapter 2 that Sanity is bothered by the fact that profitability has not grown in line with this revenue increase. Good financial discipline would say that superior revenue growth happens when profit growth is in excess of revenue growth. So we would expect in a great company that profitability should be up 23% or more versus the 12% we see. This gives us a clue to look at what may be happening to our costs or to our market pricing.

Chapter 2: Profitability Story

There are two factors that influence the profitability.

The equation is simple: revenues – cost of goods sold (COGS) = profit.

Margin is a way of expressing profit as a %. In this example we have seen margins erode from 13.33% last year to 12.16% this year. This gives us two nuances to our profit story.

Margin destruction occurs in only two ways

1. We reduced our prices (either intentionally to win more business or through response to competition)

2. Input prices (COGS) increased by a proportion greater than our ability to pass these on via price increases to our customers.

Chapter 3: Working Capital Story

The third chapter in our story concerns the balance sheet. This represents the financial condition of the business. This means among other things, keeping assets and liabilities in proportion to sales revenues (Vanity’s domain) and the expenses of the business (Sanity’s concern). It also ensures we manage the King’s cash.

The working capital story examines how much money the business uses to support every revenue dollar we make. In this case, for every dollar of revenue that Vanity sells, we consume nearly 21 cents just keeping the business operating.

Working capital has 3 elements:

Accounts Receivable (money we expect to receive from our customers for service or products rendered)
Accounts Payable (what we have to pay our suppliers)
Inventory (the goods and services we have in house which we need to provide product and service to our customers in a timely and competitive fashion)

There is a startling story in this example as we see working capital has increased from 14 cents for every hard earned dollar of revenue to nearly 21 cents. This difference is the King’s lament as it has to be funded by our cash flow (and in part a key reason why the business is consuming cash).

Chapter 4: Cash Flow Story

The King is out for blood as nearly $271 million of cash is leaving the business. The company is profitable and growing but we are not managing that growth in a way that optimizes our cash needs.

Let’s talk about the areas of dysfunction….Andre I need more on this section

Chapter 5: Return on Investment Story

This chapter is the summation of the preceding four and answers two fundamental questions:

Does our business make money from other people’s money?
Are the risks we take well founded?

Companies exist to create value for their owners. They can be funded in only two ways:

Debt. Which we may borrow from a bank or other financial lender
Equity. This is the money the shareholders or owners have in the business

They are looking to drive a superior return from these investments. This can be represented as Return on Capital Employed.

In this case ROCE is 25%. In simplistic terms if we can borrow money at approximately 7-8% interest we can convert it to a return of 25% or in other words, for every dollar we borrow to grow our business we generate $3 in return.

However, our story has a richer contest. We see ROCE has fallen from 31% to 25%.

The equation for ROCE is:

ROCE = EBIT/ Net Operating Assets

We can express it in a different way:

ROCE%=$EBIT/$NOA

So we see that ROCE shows how income statement performance and balance sheet performance combine together.

To make the story quite simple, ROCE = EBIT/NOA. Therefore we need to do more EBIT using less Operating Assets!

The Basic Story

Our visual scorecard has created a simple story that will intrigue the organization:

There is an organizational dysfunction between Vanity and Sanity. Yes we have grown by 23% but profitability has been eroded.

We are running our business less efficiently than we have in the past. For every hard earned dollar of sales revenue we are consuming 21 cents of it within our operation.

The combination or our eroding margins and our working capital inefficiency means whilst we are a profitable enterprise we are consuming vast amounts of cash which is upsetting his Lordship the King and is causing angst amongst our shareholders.

We know the risk profile of our business is sound and we can attract additional investments to grow but we have to investigate why our efforts are not generating an even higher return on investment.

This is a better message to engage the organization than the one they may derive form the complexity of the financial statements which might be perceived as sales went up 23% and profit is up to $1.4 million. Let’s continue doing more of the same.

Finding the Treasure Chest and Counting the Booty!

Armed with the story elements we can examine our Visual Scorecard to determine the treasure that is hidden and can be realized by some simple strategies. We call this treasure “Gross Potential”.

Let’s look at the key elements

First, we can look at how sensitive our performance is to price variation. If we click on revenue growth we see options to vary revenue growth and price. Vanity insists that if he had the right resources he could have made a 30% sales growth. If we punch this in and look at the net impact we see for an additional 7% sales increase or about $200,000 in value:

· EBIT rises less than 1%

· We consume $6.6million more cash

· ROCE improves by 2%

This does not impress the King.

If we reduce sales from 23% to 15% and raised prices by 6% we see that total revenues are about the same but look at what it does for the other elements of the financial story:

EBIT rises more than 3%
Working capital is reduced
Cash flow is $105million better!
ROCE is up 2% (rather than down 6%)

So Vanity has to focus more on holding price rathe than giving business away and Sanity is happy and the King has a better cash position whilst we have a better financial risk and return in our business.

Let’s look at Chapter 2. We see our COGS has risen in percentage terms. If we just hold COGS at the same level we did the previous period (representing just a 3.83% reduction):

$115 million in cash is generated
ROCE is up 8%

Chapter 3 is always a fruitful avenue

We see receivables days have increased form 46 to 55. We have already demonstrated we have the organizational behaviour to operate at 46 days. If we reduce receivables to this level the net change values are:

We get $930 million more cash in our bank
ROCE increases over a percentage point.

We also see our inventory has shot up from 88 to 122 days. There may be good reasons for this such as we are supporting a new customer segment and we wanted to make sure we had stocks on hand. But did we truly understand the consequence of this decision. It may have helped Vanity grow sales but at what cost. Well, by changing the inventory days back to the preceding period levels we see that this decision costs us:

Nearly $222million in cash requirements
3.4% erosion in ROCE

In many cases we don’t even consider inventory and its balance sheet implications in our calculations and so we don’t fully appreciate the impact it has on the King’s cash and the risk it burdens our business with.

Now in Chapter 4 let’s look at The king’s empire and see if we can’t make sense of why net income is up $260 million yet we consume $270 million in cash.

If we look at the cash flow statement we see …..

So let’s apply these areas of improvement to see the picture of Gross Potential and The Treasure Map

We applied the following impacts:

Reducing sales for 23% to 15% but having a price protection strategy of 6% points
A small reduction of 3% in COGS equivalent to last years demonstrated practice
Managing Accounts Receivable with the same rigor we did last year (down to 46 days)
Focusing on our inventory holdings and reducing back to last years levels of 88 days

Value of the Booty:

Revenues are about the same
Profitability is up 7%
Every revenue dollar only consumes 8 cents less in working capital
Cashflow is up $500 million
ROCE has shot up to 47%

Now you can develop the right strategies and management systems to reinforce the behaviours that enhance financial discipline and collect the treasure in your business. Day to day decision making is forever changed as your employees are armed with better information and are acting in a way that directly impacts the ultimate arbiter of performance, the financial statements!

2012-07-05T12:36:00.000-04:00

10 Business Performance Laws

#10 It’s about Growth QUALITY. Not growth. Use Return on Capital Employed (ROCE) as your measure not just profit.

It’s a little more complicated but in essence. Growth management is the delicate balance between infrastructure investment and time to return especially the investment in you intangible assets

#9 Know the difference between good and bad DEBT.

Some call it the leverage factor. Debt can be real cheap or real expensive. You need to understand how to know the difference.

#8 Know your company’s MAGIC NUMBERS, it’s vital signs –

Your 1-page scorecard gives you’re an immediate look at your current and future scenarios!

#7 SEGMENT – know where you are making money and cash.

Profit or cost centers must show both income statement and balance sheet performance. NOT ONLY INCOME STATEMENT RESULTS.

#6 BREAK IT before it’s broken!

What has previously made you successful will not always be the winning formula for the future.

#5 Surround yourself with PEOPLE better than you.

The great AH Ha is when you hear your people say “I did it”

#4 COMMUNICATE the vision.

Have a clearly defined goal and implement like hell!

#3 Be a LEARNING ORGANIZATION.

LEARN from learning.

#2 Make GOOD DECISIONS.

Better still, make the decision.

#1 FOCUS on focusing.

Its not 200 things its most probably 1 to 3 things know what they are and know how to focus on them.

Lagging indicators –Using Financial Statements to unearth dysfunction

2012-06-28T13:05:00.001-04:00

Unfortunately financial statements being a record of the past may or may not represent the future. As such we refer to financials and their related interpretation measures as lagging indicators.

On the other hand we can create a set of financial statements that represents a future that we wish to perform to. Some call it a budget.

The failure with “the budget” is not in the final product but more in the preparation process. Budgets are usually not the most favorite pastime for those who are involved in the preparation. Normally it takes a lot of work WITH VERY LITTLE FEEDABCK except for the not acceptable stuff people get from senior management.

More critical are the situations where senior management believes that their design of the budget process is highly participatory and they have as many people involved in the process as possible. Only in very few instances do people actually participate (apart from doing what they have to do) normally there is nothing in it for them except more work. Management even solicits proposals but they go nowhere and at the end of the day it becomes a spread sheet nightmare with a whole lot of number crunching and very little thinking

Once again we will be controversial. The budget is very important but the effort is not in the numbers it is in the thinking. Preparing the numbers should be about 5% of the total effort. In fact we will prove that a summarized income statement, balance sheet and cash statements at the very macro level are as effective if not more effective as the mass detailed line by line outputs.

We bet a $1 that when a detailed budget is reviewed against actual and there is a reasonable variation between the budget amount and the actual amount that the standard reaction is

The budget was wrong

We accounted for that in another area or it does not matter as that category is intact.

It’s a timing difference (the amount will correct itself in the future)

There is a good reason for this difference we had no real other choice alternatives

And so on

Next time please observe how these detailed line items are managed if we are wrong the $1 is yours.

Our philosophy is based on getting the foundation in place. The base of this foundation is the knowledge of the fundamentals.

Fundamental	Change agent
1. Where did we do well	What decisions combined with good execution produced the expected result.
2. Where we did well, can we do more of it	How sustainable and replicateable are the superior performance activities. Can we convert their activities in core competencies?
3. Where is the opportunity	As defined by our gross potential
4. Where are we sub par	Is it worth while investing to change

These fundamentals become the basis for our lagging indicators. These lagging indicators in turn become the driver to our leading indicators or core competencies

Let’s use our financials to assist in defining these fundamentals

Figure 8 some examples that are revealed by the financial statements that have a direct connection to the way we do business

A greater understanding of these dysfunctions will be gained in the next part 3 of our blog – The 5 chapters of financial statement communication.

Remember a dysfunction can also be a superior value added function if this is the case it would fit under fundamental 1 and possibly be part of fundamental 2.

For example fundamental 1 is about where we did well. If EBIT (operational profit growth percentage) growth % was 10% and revenue growth % was 8% we have a dysfunction although be it in the right direction. I realize this sounds crazy but it is quiet often under this circumstance that I ask the question “what did you do to get this result or outcome”. What would you suspect the 6/10 answers are!

“We not exactly sure… we increased prices on certain services, we focused on some defined segments and we made some dramatic people changes but at the same time input costs increased and we also had to drop our pants to keep 2 key customers”

Great so what’s in there is a core competency that we can replicate and what was due to a couple of stars that happen to be in alignment at the time.

The moral is that we often look over the signals that could give us superior performance. It’s amazing how our numbers can give us these signals all we have to do is know what we did that created the result and then replicated like crazy.

We are now ready to start the budgeting process. Our budgets are prepared on a macro level at least at the first run stage. The budget will be driven by the 4 fundamentals. For those environments where only fundamental 1 applies we will be most conservative with our projections. Where fundamental 1 and 2 applies we will be very aggressive with big performance improvements expected. Fundamental 3 is the tricky one as the ability to extract large amounts of value here requires a lot of good thinking, the right decisions, good execution and an excellent feedback system. In other words the management focus here must be pristine.

Create the budget clearly showing which fundamentals are implanted where. Prepare the income statement balance sheet and cash flow statement at the minimum of 4 90 day or quarterly cycles.

Now comes the fun part connecting these lagging indicators to the leading indicators or core competencies. Before we do so let’s make sure we have a foundation in what these leading indicators are and how important it is to identify and describe them appropriately

Global Financial Bridge is a great tool to identify these areas of dysfunction simply by looking at about 30 numbers in your One page scorecard.

Business Case Sales People

2012-06-15T14:03:00.001-04:00

What customers want

The recent economic conditions may have changed the way that business is conducted either permanently or for a very long time. What worked before may very well work against you today.

Yes, the customer wants a solution; that is a competitive necessity. What they really want is clarity.

How does this solution impact my financial performance?

And

The more substantive evidence you can provide the better.

Here lies the challenge. Financial performance is an integrated discipline, about how a solution will impact the whole. By the whole we mean the income statement, balance sheet and the cash flow statement.

Financial statements are the only universally recognized way to measure how and if value has been created or destroyed. Real advantage is created when we connect the solution we are selling with how it impacts the customers financial statements.

This is the Global Financial Bridge Mission … to connect people to their financial statements. The ability to start and end the communication process through the lens of the customer’s financial statements creates a whole new dimension in sales leadership.

Our answer is the ONE PAGE FINACIAL SCORECARD. Why? The total process can be explained with some 30 numbers in an interactive real time way. AND it is….

$ Informative

$ Fun

$ And Engaging

Using Global Financial Bridge motivates non financial people to want to connect to financial statements. This is the secret to ensuring interest and ongoing desire in an area which is difficult to impart into the frontline culture.

Our real value is more apparent in the experience of a real time WEBEX presentation for 30 minutes. The high impact value offer is delivered visually in an informative, fun and engaging way. We use technology to deliver a story that negates fear and inspires adoption; real time.

Figure 1 the One Page interactive scorecard numbers in $’000

The power of the one page score card allows people to do what if based on any strategic scenario. Then to measure the impact on the various decisions simply by isolating the financial consequence of the decision through the net change feature. This net change feature shows how the income statements, the balance sheet and cash flow statement are impacted all in a one page environment.

Non financial people are drawn to the scorecard as it is fixed formatted and tells the financial story based on the 5 Chapters. (See right hand side of scorecard)

Chapter 1 – Growth quality

Chapter 2 – Synchronizing operational profit with changes in growth

Chapter 3 – Working capital

Chapter 4 – Cash impact and the road to sustainable cash flow

Chapter 5 - Creating value through the return on the invested $ (Return on Net Assets)

The fixed format dramatically enhances the learning curve creating confidence with repetition.

Figure 2 Expanded view numbers in $’000

We encourage people to grow with their learning progress the expanded view portrays a far more detailed explanation of each of the 5 chapters. These detailed views are introduced as the person expands their learning capability.

What we offer

Our solution is education. We know that people can make a more compelling proposition when they relate to the ultimate scorecard being the customer’s financial statements. Where we provide unique and sustainable advantage is by combining theory with technology to create a real time experience that is engaging and fun.

The pathway to financial statement connection establishes the 4 phases of experiential learning. Each phase creates a more intimate alignment with what is being sold to how this offer could impact the customer’s financial statements.

The freely availability of listed company financial statements takes this learning to a whole new level as the One Page Scorecard can provide a instant diagnostic source where a potential solution may be the most appropriate.

We take dedicated participants to the phase of the development program that is right for them. We can provide online testing if required in order to assess an individual’s progression path.

In addition the One page scorecard can be placed on each qualified person’s laptop to use and practice on if required. The software can be branded if required to enhance the customer experience.

We train on WEBEX or in traditional classroom environments. Each phase takes between 2 half day sessions to 3 days sessions.

Please contact us

agien@gfbridge.com

2012-06-12T14:31:00.000-04:00

How we make decision around our pricing policies can have significant impact on profitability. This table shows the amount of additional sales that are required to counter the potential price reduction. For example if your current gross profit margins are 20% and your pricing policy allows for a 2% discount you have to increase total sales by 11%.

What should also be considered is the working capital impact that the price discount creates. the additional revenue absorbs additional working capital which can only be funded by cash (or more debt). Keep in mind that if you increase your revenue in the above example by 11% you are not creating more profit so your cash flow is not supported by any income statement improvement.

This table can be a great way to challenge the sales or marketing team.

You can also use Global Financial Bridge One Page Scorecard to identify the total impact on the income statement, balance sheet, cash flow and key management metrics contact Andre Gien at agien@gfbridge.com and we will show you how to revitalize your financial or board meeting for as little as $600.00

Decreasing your Prices

If Your Present Margin Is…..

20% 25% 30% 35% 40% 45% 50% 55% 60%

And you discount your price

by: Your sales must INCREASE by the amount shown below to keep the same margin…

2% 11% 9% 7% 6% 5% 5% 4% 4% 3%

4% 25% 19% 15% 13% 11% 10% 9% 8% 7%

6% 43% 32% 25% 21% 18% 15% 14% 12% 11%

8% 67% 47% 36% 30% 25% 22% 19% 17% 15%

10% 100% 67% 50% 40% 33% 29% 25% 22% 20%

12% 150% 92% 67% 52% 43% 36% 32% 28% 25%

14% 233% 127% 88% 67% 54% 45% 39% 34% 30%

16% 400% 178% 114% 84% 67% 55% 47% 41% 36%

18% 900% 257% 150% 106% 82% 67% 56% 49% 43%

20% - 400% 200% 133% 100% 80% 67% 57% 50%

25% - - 500% 250% 167% 125% 100% 83% 71%

30% - - - 600% 300% 200% 150% 120% 100%

The table above indicates the increase in your sales that are required to compensate for a price discounting strategy. For example, if your margin is 40% and you reduce your price by 10%, you would need your sales volume to increase by 33% to maintain your profit. Rarely has such a strategy worked in the past and it’s unlikely it will work in the future!

Empower Your Team With Knowledge

2011-04-08T16:55:00.000-04:00

Empowering your people in the discipline of financial performance management significantly enhances their ability to impact the quality of their decisions and actions.

It is estimated that more than half of mid to senior managers do not have a clear understanding of how the income statement, balance sheet and cash flow statement integrate. Managers make ongoing decisions that impact the income statement favorably but could cause a significant adverse impact on the balance sheet and cash flow. Alternatively cash favorable decisions can have the reverse effect on the income statement.

Consider the case where a senior management team implemented a scorecard measure of 98% on time delivery in full. The focus on this metric significantly improved customer satisfaction, however the improvement was most detrimental to the balance sheet. In a typical traffic light system, working capital requirement significantly increased with cash flow quality moving from dark green to bright red. We can share numerous famous and possibly some infamous real life examples of how financial statement understanding can highlight operational dysfunctions.

So why do the known conditions not automatically become common knowledge within the organization?
It's called the "organizational blind spot": knowledge known by others but not known by the people in the decision execution process.

So how can improved financial statement knowledge help reduce my organizations blind spot? The answer is simple. The way financial statements are designed do not facilitate the ability to tell the story behind the numbers. This communication constraint reduces peoples dependence on the financial statements as the core management tool. It simply becomes the scorecard that accountants create. Who cares what finance puts out, right? To prove the point, road test this question... ask all managers who receive Financial Statements what they do with them. Then ask them to show you. Look at the ratios, if any. Look for remarks, calculations, see anything?

You may get many answers but the one that you most probably wont get is "I use my Financial Statements as a core management and decision tool." To take this one step further let me tell you a story of a NASCAR race team. The guilty party was the R&D department where it was perceived that costs were out of control.

Accounting response was to provide R&D with a more informed picture. They created a budget based on people cost, machinery and equipment cost, travel costs, consultancy and all the other standard cost categories. The reports were produced with actual against budget with the hope that the variations would change behavior. What do you think the result was? Spending stayed the same actually went up slightly.

We were doing our financial performance training and one of the required attendees was the VP of R&D, highly against his will; "How can a better understanding of Financial Statements make my cars go faster?"

- Just you wait Henry Higgins!

Being a little inquisitive to the manager's response I inquired as to what his financial accountability was and how this accountability integrated into the management system as a whole. He explained that he has clear accountability but has no way to manage it. The reports do not help me reduce my costs. I responded with the simple question what exactly do you do in the business; "I make cars go faster was his response" To do this I focus on heat reduction, aerodynamics, perform tests with our cars under different conditions, we experiment with different engine components. My answer is what if I could give you a set of financials based on those things that you do would this help. I explained that it was reasonably easy to show the cost pools based on

Heat reduction cost
Aerodynamic costs
Testing
Engine modifications
Chassis modifications

His response was that would be enormous as; "I know the impact heat improvement has on the track and I could possibly be spending way too much on this initiative." This became a senior management recommendation from our training.

It is amazing how this led to some major changes as a further example testing was done on a free track some 2000 miles away. This track was very popular as the usage of the track was free. The reality was to get there with 4 cars pit crews etc was not. Paying for a local track would reduce testing costs by some 50%. What we have learnt is that the key is in how financial statements are communicated. This is not a skill that many organizations possess nor do they even think is necessary.

This big barrier here is that Financial Statements are usually reported in some static format. This is where we believe that if you can bring your numbers alive the discussion becomes very engaged with some real different ways of thinking.

Our recommendation

Create a platform to communicate the numbers in a simplistic but easily understandable format.
Facilitate learning by using the same platform with each meeting
Engage this discussion by showing the impact of different decisions through comprehensive what if's that can be shown on a real time basis.

Connect people to the different value add metrics
Connect the value add metrics to your core competencies that drive the success of that metric.

On this example page from Global Financial Bridge our companies can see the integration from Income Statement to Balance Sheet and Vice Versa. Simple.

We discovered that this can't be created by spreadsheets, so we know companies that realy on Excel, are shooting in the dark, basing their managements ideas on intuition and not the rigor required by hard evidence.

So our question to you is; are you basing your company decisons on hard evidence or a gut feel? If you want to see the results of your decisions in a simple, easy to understand format, contact us. You may be surprised by what you learn!

Forget the statistics: Are you winning or losing the game?

2011-03-07T15:05:00.000-05:00

One of these key analytical tools that is often underused or misunderstood in business is the financial statement. But, it is, in fact, the ultimate scorecard. Reportedly, 50% or more of mid- to senior managers do not have an appropriate understating of the integrated workings of a standard set of financial statements. Think about the significance of this finding—business failure can be directly linked to a company that doesn’t educate its employees on how to take an active role in maintaining financial health.

The CFO and his or her finance department are typically considered by the rest of the company as living on their own island. While they are regarded as having a specific and important expertise, even a dynamic CFO can be frustrated by not being able to get the rest of the company to understand and follow business fundamentals that bring forth good financial performance throughout the organization.

So where is the constraint? Is it in the process or content? The truth is, it is probably both.

Most managers who review financial statements have one common objective...to easily understand what the numbers are saying.

According to Andre Gien of Global Financial Bridge, “financial statements are not designed with the customer or reader in mind, so we take a company’s income statement and balance sheet and convert them into a format that provides a one-page scorecard.”

Gien noted that this approach provides a tool to answer the following questions:

What is the impact of different price strategies on profit, cash and working capital?
What is the impact of a large new customer on profit cash and working capital?
If we reduce our inventory portfolio how could this impact profit cash and return on investment?
How will an additional sales person impact profit cash and working capital?
What is the impact of reducing inventory by 10 days holding?
Are our current strategies producing a cash absorbing business if we grow?
What was the impact of improving our margins and reducing our revenue?
Do we need to focus on how we manage our income statement or our balance sheet?
If we want to achieve an operational cash flow of $xxxx what amount of sales do we need?
What will our future profit, cash and balance sheet look like if we can execute on our plan?

“Having the ability to measure the outcome of your answers to these questions can produce a real competitive advantage, allowing for decisions to be made on evidence as opposed to intuition,” said Gien.

The scorecard is interactive, allowing you to do "what ifs" on key financial performance, and allows for a comparison of different scenarios. A company can measure potential actions and their impact on cash flow, profit and return on investment. In effect, the use of such technology can provide the ability to road test financial decisions before they’re made.

For those of you who want your scorecard presented to you please contact Steve STravis@travisconsulting.com for your personalized view of your business performance .

Relevance based Loyalty

2010-09-03T11:11:00.000-04:00

The traditional loyalty strategy is driven by all forms of incentive tactics. Loyalty points for this, buy one get something for free, click here and get … the list is endless.

Do these incentives really create the loyalty that truly connects the customer to the brand? Well it could be argued that it depends. It depends on what’s being sold, the frequency and volume of purchase and whether it is a service or product. This means that we have to have a way to measure the effectiveness of the program.

In order to design the measurement system we have to consider the potential variables. Including

Lead-time to customer profitability
The ease to switch to substitutes
The cost of customer maintenance
The potential customer lifecycle

For example:

Long life cycle customers – Business banking industry

Now we know the Angels are the Golden Goose but intuitively what we do is deliver the Hopefuls for 2 reasons
1. It’s easier
2. We need volume and thus we usually target a larger market with the hope that this strategy provides greater opportunity for success with reduced risk. Our conversion is usually on the low side which has its obvious impact on the cost of acquisition.

The next part to our strategy is to use the Hopefuls to create Angles. This is the hard part deploying tactics ranging from referral programs to various form of cross sell methodologies.

Our focus here is to enhance the existing strategy but with the main difference in using the “common interest between customer and banker” as the key driver to loyalty.

What could this common interest be? In the case of the commercial bank that lends money to business it HAS to be the financial statements.

This creates a significant opportunity to leverage on this on these statements to create long term relationships.

How can this be done? In our opinion education is the starting point. The undisputed fact is financial statements are the globally accepted vehicle that measures business performance, yet they are the mostly underutilized. The reason is simple, financial statements are not designed to be a communication platform. In specific how the banker sees the financial and how the business sees the financials are very different. We often use the analogy that the banker speaks Portuguese and the business person speaks Spanish both languages sound similar but very differently understood. The business person is income focused and the banker is balance sheet focused just as a starting difference.

Business people find it extremely valuable to know how the banker looks at a set of numbers and then if you can add additional understanding to help the business person to use his financial as a real management tool is the pathway to true loyalty.

Can you imagine the discussion between two business people “my bank has shown me how I can use my financials to improve my banking risk and manage my business in a more effective way, for example I had no idea my business is cash absorbing when we grow”.

We deliver this education process through our One Page financial scorecard that connects all the moving parts (Income statement, Balance sheet and Cash flow statement) into a story about the business empowering participants to understand how different actions and strategies impact their financial performance both from the business perspective and the bank perspective.

An example of the interactive scorecard shown below clearly helps employees understand that increasing revenues is not the same as making money. We believe in the adage:

“Revenue is vanity, profit is sanity and cash is king”

Our Mission … to help individuals and companies achieve higher performance through interactive financial statements learning.

Emotion and the power of stories is how human beings act and learn

We have created a way to emotionally compel organizations to act through the power of the financial story. This story can be broken down in to 5 simple chapters that anyone can learn.

The story of Financial Discipline is easily mastered in 5 chapters (As depicted in the right hand side of scorecard):

Chapter 1 – Growth quality

Chapter 2 – Synchronizing operational profit with changes in growth

Chapter 3 – Working and fixed capital alignment

Chapter 4 – Cash impact and the road to sustainable cash flow

Chapter 5 – Creating value through the return on capital employed

The story can be summarized in the ONE PAGE FINACIAL SCORECARD. It is

Informative
Fun
Engaging
Compels organizations and individuals to take action
Completely interactive enabling changes based on any decision isolating the impact on that decision on the income statement, balance sheet and cash flow.

What we offer
Our primary solution is education. We train people to tell the financial story through 5 easily mastered chapters.

The story is brought to life in a unique and dynamic way through the interactive tool, the one page financial scorecard.

Contact Alan Adler at aadler@gfbridge.com or Andre Gien at agien@gfbridge.com

Knowledge is power?

2010-08-31T10:29:00.000-04:00

The truth of this statement depends on where the knowledge is housed. If confined to specific individuals or within specific departments the knowledge power equation can be significantly diluted.

So what’s the Holy Grail, we call it common knowledge. The core competency of any organization to create, maintain and enhance knowledge and understanding of the key business ingredients.

Those that posses this skill have a definite competitive advantage.

One of these key business ingredients is the company’s financial statements or its ultimate scorecard. Approximately 50% or more of mid to senior managers do not have an appropriate understating of the
integrated workings of a standard set of financial statements. Think about the significance of this finding, could it be a key driver to why business fail or the reason or why business can’t get finance under the new bank scrutiny régimes.

How does the absence of common knowledge manifest itself sometimes even unknown to most business to the point that the creation of common knowledge is actively discouraged?

The finance department headed by the CFO is usually considered in its own island with its very specific expertise that in the main only has relevance under specific circumstances and conditions.

This culture is most frustrating for the modern dynamic CFO who knows that permeating the fundamentals of the discipline in financial performance management throughout the organization is one of her most important tasks.

So where is the learning constraint, is it in the process or content. We believe it is both. The fundamentals of what creates powerful organizational learning include.

Relevance, people connect to learning that will enhance their career or ability to perform. For this reason on the job training is still one of the most effective ways to transfer knowledge
Real time feed back, the more instantaneous the feedback loop the better.
Interactivity, the ability to simulate scenarios without any consequence promotes creativity and innovation.
Simplicity, the ability to deliver complex material in a format that makes it look easy and thus creating an environment for participation and contribution.
Familiarity, learning is significantly enhanced if the learning is customized to the participants business environment

Most people would agree that there is a close relationship between financial statement knowledge and

Good decisions
Awareness of opportunity
Reduction in waste
The consequence of time, cost and quality management
How cash is created or destroyed
How value is measured
What banks are looking for and why
The difference between good and bad debt
What need to be done to have a strong balance sheet
Differentiation between balance sheet actions and income statement actions.

The challenge is to use financial statements as a core learning platform that is relevant, provides real time feedback, is interactive, yet simple and uses the business own numbers (familiarity).

The most powerful way to achieve this is through the Global Financial Bridge one page scorecard.

Figure 1 Interactive financial statement communication platform $’000

This process transforms the standard financial statements into an integrated environment facilitating the ability to communicate all the financial statement components in a single platform.

The process uses the business own financial statements which immediately changes the communication dynamics as it becomes personal.

The one page fully integrates the actual statements as well as how those statements are performing. The original meaningless numbers are translated into a story about the business. Chapter 1 of the story starts with growth, communicating the difference between good and bad growth. Chapter 2 evaluates the income statement performance and how growth has created or destroyed value. Chapter 3 reflects how both growth and the income statement impacts working capital. Chapter 4 discusses cash, how it’s created assessing the cash quality and the key ways to measure cash from a proactive and reactive standpoint. Chapter 5 deals with structure and value creation, what creates and destroys shareholder value.

Interactivity and real time feed back is empowered through the “what if” or stress testing ability. Any variety of strategic alternatives can be entered into the scorecard to quantify the consequence of the decision. The net change capability isolates the financial impact of the decision to simplify the how the income statement, balance sheet and cash statement changed and what are the drivers that created the change.

The learning experienced is driven by the standardized platform that creates familiarity. This same familiarity encourages spirited collaboration driving innovative ideas and performance enhancing solutions.

Due to the way the education process simulates reality (business’s own numbers, real time what if analysis and the real time ability to isolate and measure strategy) true common knowledge is created and over time actually becomes cultural.

So if creating common knowledge is the Holy Grail I am definitely not the first person to identify this. Companies are continuously developing human capital with large amounts of money being spent on “training”. Unfortunately there are little value measures around these investments yet they know it’s important.

So where is the possible dysfunction between the cost of learning and the benefit delivered based on the investment made?

The first area of dysfunction is the difficulty in measuring the cost benefit ratio. The other relates to what happens when the knowledge transfer process is done. There is usually no tangible evidence that produces ongoing deployment of the learning.

This is where Global Financial Bridge delivers a unique value offer. We provide the knowledge transfer using your numbers making the learning very relevant. The integrated learning is facilitated with the use of the Global Financial Bridge financial statement intelligence tool producing two key outcomes

1. Attendees learn how to use financial statement as a way to connect operational performance to financial performance

2. We leave the attendee’s with the Global Financial Bridge tool for their ongoing use after the learning process is completed.

Our customer feedback shows this is exactly what they want, the ability to for attendees to have a way to show that the training “sticks” leaving a system that is deployable long after the training is completed.

Contact Andre Gien on 925 323 2802 or agien@gfbridge.com

Ken Fleishman on 301 785 0330 or kfleishman@gfbridge.com