Week 3 Strategy Series | Refined Focus for Profit Clarity - What are we doing? Part 1
Part 1 of 2 | Quadrant 3 | Activity Inside My Business
A big mistake many community and business leaders make is that they don’t know what makes them money today, how to make more, and how important their personal leadership style affects the success of their business.
We have more control on what we do than control over external forces. In Quadrant 3, Activity Inside my Business, I break the business into four key areas, the same areas I will eventually use for Pillar 3 of Planning: Establishing Strong Roots through Strategic Objectives;
1. Leadership and Governance
Includes board and management, and may include areas such as board succession, governance education, leadership and culture and strategic human resources.
2. Operational Profitability
Includes all areas that earn revenue.
3. Community and Communication
Includes marketing, technology, and community engagement.
Include master plans, sports facilities, safety and security, and utilities.
For each business unit under the headings, I ask questions such as;
What are the strengths
What are the weaknesses
What are the opportunities, now and in the future
What are the risks, now and into the future
What is the culture of prioritisation
What is the business model
How have all these aspects affected financial performance
What may the business need to keep, or do differently?
We are looking at Operational Profitability in this blog post.
There are two layers in beginning to analyse operational profitability. First is looking at the historic and high level performance of the organisation through annual reports. Second is the financial performance of individual business units.
Annual Report Reviews
The financial statements in the annual report provides information about the overall financial performance and financial position of the company. Understanding the financial position of the company is critical to ensuring we are selecting the right strategies to realise profitability and growth.
The four primary financial statements are:
Statement of comprehensive income
This statement provides information on the organisation’s financial performance. It usually shows the total revenue, total expenses, and the difference between the two. The difference is a surplus or deficit (or profit or loss).
Statement of financial position
This statement, which is also referred to as balance sheet, shows the monetary measure of all the resources controlled by an organisation (assets) and all the obligations due by the organisation (liabilities) at the year-end. Assets and liabilities are classified as current or non-current in order of liquidity.
Statement of changes in equity
This statement reports all changes in the reserves (or funds) held by the organisation during the financial period.
Statement of cash flows
This statement shows the cash inflows and outflows for the financial period from operating, investing and financing activities.
Analysis through Ratios
Ratio analysis links the financial statements together. We develop a feel for a company’s competitive position, financial strength, and profitability over time, and learn to understand past strategic decisions and their financial impact.
Key questions to answer
Through the analysis of a series of annual reports, say over the past six years, we seek to answer the questions below. We learn about which ratios to calculate in Integrated Governance’s Applied Director Training.
Is the company in financial jeopardy
What is our income – total revenue, operational and comprehensive
What are our personnel wages and liabilities
Are we growing
Can we take advantage of opportunities
Are we prepared for sudden disaster
What are the significant monetary events coming up
Are we compliant (e.g. tax, superannuation, etc.)?
Once the historical financial narrative is clear, we can answer questions, like the following examples, which will help us shape specific strategies;
Do we need to consolidate our business – e.g. selling off property to raise cash
Could we expand our footprint or make better use of our physical assets – e.g. master planning, or purchasing additional businesses
Should we invest into additional assets – e.g. purchasing property
Do we need to reduce, restructure or realign our workforce
Do we need to cut operational expenses
Should we make sure we have enough cash for disasters?
Write your answers down in your compelling findings.
Trading Statement Review
Trading statements are segmented income statements for the different trading areas that generate revenue within the organisation. We look at these over the period of minimum 12 months looking at monthly income (total revenue, operational income, and net income), trends, financial impacts of previous decisions, and labour costs.
The next layer of analysis for each trading areas crosses over to research we conduct as part of Quadrant 1, People on the Inside. We can look at top products items using parameters such as popularity and profitability. (The same can be done for lowest products which then can be removed).
There are many more ways you can conduct a business review, and a lot of it is dependent on the style of business you operate. There are no statutory limitations, and using customer data in conjunction with sales data will assist discovering more of your business secrets.
Key questions to answer
Again, once the historical narrative is clear, we – or our management team - can answer questions like the following examples, which will help us shape specific strategies;
How does my historical financial performance inform future considerations?
Where do I see sales trending in the next 12 – 18 months if I do nothing differently?
What are my input variances (e.g. cost of goods, cost of subscriptions) and output elasticity (e.g. price customers are willing to pay)?
What inputs are under threat of fiscal variations (e.g. cost of fuel)?
Is my cost of production compatible with my revenue?
Can I save money per transaction?
What is the best use of cash; how will investment into this trading department fund future growth?
Who are my emerging competitors in this product or service line?
What part or aspect of the trading is giving me the most trouble now, and possibly in the future?
What part of the business is being ignored that has more upside potential?
What are the catalysts that will affect trading departments?
What do I need to make $ and % to reach our overall financial targets?
How am I measuring results beyond the basic ratios of profit and loss to include such measures as return on assets, return on education and long term value of customers?
How do I invest the money I have saved?
For each trading area, write out your compelling findings.
While it’s tempting to do a surface analysis of your activity, insight is gained from digging deep and challenging your business.
Your business may be progressing profitability, yet there are risks in the cultural aspects of leadership. Your business may have a great culture, but you can’t work out why the business isn’t making more money. Maybe business growth is challenged by a competitor wooing customers away, which may mean a change in direction on what you do, and who you do it for. It may be that your board and management need to upgrade skills, processes, and leadership for a changing society.
Reviewing activity inside your business is where it helps to have a third party with fresh eyes, and few of the biases we outline in this chapter. This chapter could have been many, many more pages of analysis examples and approaches!
Remember to write down your compelling findings.
CONTACT: SHAYNE LESLIE 0412 241 773