subject: The Business Calculus For Success [print this page] Recently, the economy has generated a time of uncertainty. The trick now lies with understanding how to transition from uncertainty to opportunity. A consultatant helps businesses in any industry understand how to do just that. There is a seven-step model for developing strategic, operational, and tactical initiatives.
Seven steps:
1. Understand and project current business...
This is difficult for many businesses. As businesses develop, they become extremely complacent. Complacency breeds disorganization. Disorganization is the number one precursor to hardship. Understanding and projecting current business is the first step in a series of efforts to regain organization. First, a business must know what goods or services it provides. For example, a business may want to know what law governs its activities; common law or the Uniform Commercial Code . Because most business activities are contractual in nature, businesses will have to familiarize themselves with the states' specific interpretations of each. From there, they may be able to shape certain organizational behaviors. Businesses must be able to understand and project current business so that they can get a clear picture of individual sect efficiency. This comes through a clear representation of every sect of the business and a specific analysis of profitability. An example of this would be segmenting how each dollar is earned. Are you providing a service? Are you providing a good? Are you providing both? Often a service maintains the product that is sold. To better understand the dynamics of what your business is offering; profitability is usually where you will find the answer. An example of this would be a car dealership. It would appear that an auto dealership is making most of their money on selling the vehicle itself; however the higher profit margin may be on the service of those vehicles. It is important that employees and management can distinguish between the two if this is the case. Gaining an understanding of what goods and services the company is providing and how that shapes a company's projected performance is essential.
2. Account for current and future cash flows based on current business...
We know that we can never completely rely on continued business, but we must still attempt to determine residual revenue streams from continuing operations. Business is interesting in that most organizations don't make overnight changes. There are generally too many moving pieces in business to adapt overnight. Therefore, it is safe to assume for the most part that the general sects of business will remain unchanged or will change incrementally more often than not. If we can observe these sects and associated performance averages we can visualize the true foundation of operational productivity, profitability, and resources at the organization's disposal stemming from said operations. Essentially, the best way to achieve some level of clarity in this portion of the analysis is to take the data derived from step 1, multiply the net income from operations within each sect of the business by the average sect volume. Add all residual revenues together from each individual sect to create a rough estimate of organizational residual revenues.
3. Understand the business and the market in which it operates...
Unfortunately, simply completing a chart based on previous months' performance is not the end game. If businesses were to stop their analysis here in January of 2008, the forecast for CY 2008 would have been extremely misleading. This misrepresentation generally stems from an inability to account for independent and dependant variable shifts. Dependant variables are essentially what is being observed. For example, we evaluate a generator company's monthly signing of service contracts as a dependant variable within the company's service business. Most managers account for this type of variable because it has a direct impact on the company's balance sheet. Independent variables are essentially the factors that affect change within the dependant variable. In our generator example, an independent variable may be the closing of another company in the market space that can cause changes within the dependant variable. This is traditionally the part of the analysis that is overlooked and misunderstood. Being able to understand what these variables are, and predicting outcomes associated with changes in the status quo of each is essential to visualizing posture and preparing the organization for the future. Inability to understand the mechanics of these variables at all levels is the beginning of a downward spiral for the organization.
4. Perform a SWOT Analysis...
Once a strong grasp on the organizational business foundation and the variables that shape it is established, it is absolutely critical that this newfound understanding is utilized to assess strengths, weaknesses, opportunities, and threats (SWOT). When conducting a SWOT analysis, internal and external factors must be evaluated. Strengths are anything that the business is doing extremely well. Weaknesses include any arena in which the organization needs improvement. Opportunities are things that the company can utilize to further its drive toward success. Lastly, threats are foreseeable obstacles that the business may face. Throughout the process of performing the SWOT analysis, the most important thing to remember is to maintain objectivity. If an owner or manager tries to evaluate their organization and can't find any weaknesses or threats, the exercise is not being done correctly. As the ideas begin to be born out of this process, it is important to systematically consider any additional implications. For example, one threat may have a significant amount of independent variables that may need to be addressed.
5. Focus resources on emphasizing strengths, addressing weaknesses, capitalizing on opportunities, and eliminating threats realized through the SWOT analysis...
Being able to generate data is one thing; understanding what that data means to the organization is another. Often times, owners and managers can take a cursory glance at profit margins and think they have a good understanding of what is making their business stay afloat. The truth is, we must carefully consider all data derived from the first 4 steps of this analysis, and determine what the best allocation of resources should be. In step 1, we dissected company sects and their rough net income from operations. In Step 2, which is the largest development factor in determining an organization's resources; we determined how these sects' performance shaped the overall residual revenues. Step 3 allowed us to take an objective look at the company, and consider the variables that affect the organization on different levels. Finally, in step 4 we took this data and attempted to maintain objectivity in reviewing the company's strengths, weaknesses, opportunities, and threats. Now that we know where the company stands, we must determine what action to take based on all that we have learned thus far. What is important to understand is that all four categories have second and third order effects in other categories. One of the best ways to generate these action steps is through a process known as association. What association means is that an owner or manager can take all of the factors surrounding the business realized through step 4 and understand how strengths can address opportunities, threats can address weaknesses, etc. Seeing these connections can help a decision-maker understand what action steps make the most sense for the company.
6. Finalize a snapshot of the business for the upcoming twelve months...
Now that we have all of the relevant information and a plan of action for this organization, we can visualize the future. It is important for most businesses to have long-term projections associated with goals over periods of 5 to 10 years. However, predicting performance for the upcoming 12 months is priority number one. Many organizations become so consumed by vision that they are unable to cross the necessary bridges required to realize that vision. One of the best places to step away from broad-based vision and toward practical application is financial projections. With respect to financials, statements of cash flows and its implications with respect to the balance sheet are most important. Admittedly, most balance sheet projections are not going to be easily developed. Not only are an organization's figures usually not going to conveniently be round numbers, there are variables within a balance sheet such as interest on notes payable, changes in taxes, cost of goods sold, and much more that must be carefully considered. That is why it is important for organizations to ensure that they have highly proficient managers overseeing this process, or they work with a company that can supplement internal personnel in this analysis.
7. Monitor progression and make necessary changes according to performance...
With all the information collected and a plan in place, there is nothing left to do but manage progress and adjust accordingly. Though this step may sound simple, it requires a perpetual monitoring of each step previously taken. This must be repeated regularly. In this global business environment, information becomes obsolete quickly. The reality is, even though businesses do not change overnight, dependant and independent variables may.
Conclusion
There are no easy answers in business and there are many layers of friction associated with running an organization regardless of the size of the company. This formula provides a systematic method for addressing such a complex task.
