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Posts Tagged ‘operational efficiency’

Financial Ratios ARE NOT your KPI’s . . . .

July 14th, 2009 Comments off

            As a follow-up to yesterday’s post, I wanted to expand on the area of having effective measurements and the ability to quantify what is happening with the organization. There’s no discounting the value of all the standard financial ratios, working capital measurements, and HR-related figures that tie back to revenues & other financial figures. However, these measurements are standard through any organization, are easily studied in any business school textbook, and really don’t provide the necessary insight to increase operational productivity. These are merely barometers to give you an additional confirmation that your efforts are paying off and your key measurement tools are providing the appropriate data for decision-making.

 

            Well that’s a great point of view, but what are the key measurement tools and what about a practical example that can bring that full-circle?  Let’s take the example of an apparel company that is selling to smaller retail customers. For years, that small company continues to grow, is building a great brand, and the strong growth is unknowingly masking the growing inefficiencies of the company. In further support of the company’s growth it acquires one or two very high profile customers that have hundreds of stores.  As growth starts too slow, or perhaps stalls, what are the measurements that you have in place to identify what your areas of weakness are and give you the necessary insights to focus your efforts and get back on a path of growth?

 

·         What is your revenue distribution among your customer base? Do you have too strong a concentration with any one customer?

·         Are you driving your revenue growth with lower quality sales that do not carry the margins upon which you built the business?

·         With the growth that you have been able to drive through a few new customers, do you have reporting in place that indicates the health of your core account base? What are the average revenues per door for your core accounts? Stable or increasing?

·         Are you having to commit an unusually high amount of resources to support newer significant customers and is this factored into your net customer margin calculations?

·         As a wholesale supplier, do you have effective reporting on your sales personnel and their productivity? What are their metrics versus last year, on a per-door basis, etc?

·         Are you tracking discount and markdown activity by customer? With these two factors in mind, do you have the ability to report net contribution margin by customer?

 

            There’s clearly a distinct difference between the standard financial ratios and those that you need to drive strategic decision making. If you’re coming to an organization where these measurements are absent then you quickly need to get up to speed with the company to develop a set of indicators that will support the rest of the team in their decision making. Changes in a consolidated gross margin figure or revenue per employee are not going to drive strategic initiatives.

 

            With the above considerations in mind, tell me how your indicators that track revenue by employee, working capital days, consolidated gross margins, operating expenses as a % of revenue, and all the other textbook indicators are going to really help you drive aggressive increases in corporate productivity. The only way you’re going to get there is to have a full understanding of your business, be willing to roll up the sleeves, and come to the table as a financial strategist for the rest of the team. You need to be aggressive in your approach to reporting and find the hidden information gems within your business that you can polish and exploit.

 

Thanks for reading . . . .

 

Jeffrey Ishmael

Discipline #5: CFO as the Master of Measurement

July 13th, 2009 Comments off

            In the last segment on “Reinventing the CFO”, I covered the CFO role as the Warrior of Waste.  The 5th  discipline in Jeremy Hope’s book is CFO; Master of Measurement. This is perhaps one of my favorite sections of the book, and the one area I so rigorously incorporate into my day-to-day operations. Not only in a financial perspective, but in an operational perspective. Without measurement, there is no assessing the progress the company is making, not to mention the accountability that measurement can bring into the development of management goals.  The latter being one of the more important areas, which ultimately will drive the operational results.

 

     In Jeremy Hope’s book, he notes that the CFO has a key role to play in changing the measurement culture.”  Hope suggests that in order to efficiently fill the role of Master of Measurement, the CFO needs to:

  • Measure to learn and improve
  • Choose the right measures
  • See measurement as patterns, trends, and abnormalities
  • Provide external reality checks
  • Use a range of measures to inform a dialogue about management performance

 However, before any senior Finance manager can start implementing new methods of measurement, the source data needs to be thoroughly understood and its accuracy confirmed. Depending on the size of the project, this might take weeks, or it could very well take multiple quarters if the data sources is a new one and needs to be implemented throughout the organization.  I would cite a new labor reporting platform for North America as a perfect example of a new data source contributing to a new source of labor productivity measurements.

 

For one company I worked at, we had a field service organization that was comprised of 150 field engineers, generated almost 350k paid hours annually, and was responsible for approximately 30% of our revenues. Yet there was no reporting structure in place that reported our productivity levels, hourly cost rates, or the distribution of hours by activity. In an effort that spanned the better part of a year, we implemented a new payroll reporting process that had our engineers reporting their field hours by activity. We rolled this platform out by region, and as we did so, we reviewed the data monthly with our Regional Service Directors to confirm the information. Once we had consecutive quarters of data, we initiated the process of publishing the results and then implementing monthly & quarterly goals for labor productivity and specific improvement plans for non-productive areas where hours were lost.

 

It was not an easy process and it took an open and collaborative approach with the field organization since there was an inherent distrust of anything previously published and there was no confirmed data source that anyone trusted. As a result, we realized a full 10-point increase in productivity levels, which effectively meant the avoidance of hiring an additional 15 field service positions.

 

My reliance on implementing measurement tools is very high, but only those tools that I can trust, since ultimately, those tools will result in implementing levels of accountability for the team, as well as other levels of management in the organization. In the end, accuracy is key. While it’s quite easy to be excessive in assembling a toolbox of measurement tools, brevity is key so that you have the proper tools to drive increased performance with your staff, and ultimately for the organization. Do you have an effective set of tools and do you trust them?

 

Thanks for reading . . . .

 

Jeffrey Ishmael