When companies want to grow, they usually think “more sales!” But can you keep your promises to your customers? When the captain calls for full speed ahead, is the company ready to respond? Can you accelerate profit and growth at the same time? It’s important to measure the right things to move the needle on your business model and to change behaviors in your organization. Doing so can help you respond the call for full speed ahead!
Many companies outrun their cash during periods of rapid growth and more companies fail due to rapid growth than due to flat or declining sales. Most continuous improvement and process improvement methods such as lean, six sigma, theory of constraints and others focus on getting more efficient, but many executives wonder why, after several years of effort, they’re not making any more money than before they started these improvement activities.
The key elements of The Executive Command Center® are Speed, Profitability, Cash Flow, Capacity and Agility. When you’re planning for growth, all five must be in place in order to meet your commitments to your customers, work within your current cash flow parameters, and improve profit (not just efficiency).
Peter’s Drucker’s classic saying, “what gets measured gets managed,” couldn’t be more true; if you want to move the needle quickly, measurements are a very useful tool. In many companies, simply putting measures in place dramatically improves performance. One company I worked with took their shipped-on-time rate from 24% to over 80% in less than 90 days simply by measuring the activity and reporting it to the employees.
Many companies rely on financial statements for their measures, and that can be effective if two things are in place:
1) The reports are formatted to provide meaningful information to non-financial managers.
2) They’re timely. Many companies close 10 – 20 days after month end, which renders the information too old to be useful.
Regardless, relying on financial statements is often referred to as “driving with the rear view mirror” because all of the data is historical and can’t provide timely, forward-looking measures.
Meaningful measures can be fairly simple to calculate. Three I like to use are:
Cash to Cash Cycle
This combines the inventory days on hand with the receivable days outstanding and subtracts the accounts payable days to show how long it takes from the point when you spend a dollar to the point when you get it back. Good numbers are usually below 60 days. You can check data for your industry to get good performance benchmarks. I’ve seen too many companies with numbers over 200, which is why their bank introduced me to them!
Daily Flash Report
This is a simple spreadsheet that measures meaningful information every day for the management team. The contents are different for every company, but they usually include revenue, number of orders received, number of orders shipped, shipped-on-time percentage, returns, scrap, overtime hours, bank/cash balance, etc.
These data provide a running score for the company. For one client, one of the things we measured was overtime hours, which they had never tracked or reported. Just putting that number in front of the management team led to “what gets measured gets managed,” and they quickly achieved a 2% (of revenue) bottom line improvement.
Turn & Earn Report
This report, originally developed for the wholesale distribution industry, measures performance part by part in terms of revenue, cost, inventory, margin, obsolescence, etc. It shows which items are profit makers and which are consuming cash. Many executives are surprised to find that what they thought were their big money makers turned out to be big profit losers.
All companies have inventory and it’s almost always your largest single cost category. It might be in the form of products or parts; it might be hours, people, technician time, programmer time, etc; or it might be equipment like service trucks, copiers and rental stock. The point is to identify your “inventory” and manage it. Inventory of any kind always consumes cash, whether it’s to buy parts, pay people or acquire capital equipment. The ability to optimize need with consumption is critical to responding to the call for speed.
Did you know you can increase your capacity by 20 – 40% or more without capital expense? There are a number of ways to do this including:
- Process improvement
- Partnering with suppliers
- Partnering with customers
The key here is to leverage your fixed costs by first eliminating things you really don’t need to do, simplifying what’s left and automating when appropriate. Too many companies leap to the automation step, which actually reduces your organization’s flexibility.
From the Flight Deck
Are your ready for the call for “full speed ahead?” Do you have hidden cash that could be used to finance your growth? Are there opportunities to increase your profitability by 10% to 20% per year? Can your capacity be grown 20% to 40% without capital expense? What do you need to do to keep your promises? Call me to find the keys to successful growth, profitability and cash flow.
© 2016 – Rick Pay – All Rights Reserved