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The Fundamental Laws of Business Get a grip on any company, regardless of size

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Get a grip on any company, regardless of size or locationWhy was a publisher willing to pay General Electric chairman Jack Welch an eye-popping $7 million advance for a book about

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Слайд 1The Fundamental Laws of Business Get a grip on any

company, regardless of size or location.
Prepared:
Phd Kargabayeva Saule Toleouvna


The Fundamental Laws of Business  Get a grip on any company, regardless of size or location.Prepared:

Слайд 2Get a grip on any company, regardless of size or

location
Why was a publisher willing to pay General Electric chairman

Jack Welch an eye-popping $7 million advance for a book about his career?

Get a grip on any company, regardless of size or locationWhy was a publisher willing to pay

Слайд 3An understanding of a few financial measures coupled with an

enterprise-wide perspective, Charan maintains, can help you get a grip

on any company, regardless of its size or location. “When you come right down to it,” he says, “business is very simple. There are universal laws of business that apply whether you sell fruit from a stand or are running a Fortune 500 company.”
An understanding of a few financial measures coupled with an enterprise-wide perspective, Charan maintains, can help you

Слайд 4Understand the Measures of Moneymaking
Business acumen, writes Charan, is “the

ability to understand the building blocks of how a one-person

operation or a very big business makes money.”
Understand the Measures of MoneymakingBusiness acumen, writes Charan, is “the ability to understand the building blocks of

Слайд 5Three measures can give you a good picture of whether

and how a company is making money:
growth,
cash generation,
and

return on assets.
Three measures can give you a good picture of whether and how a company is making money:growth,

Слайд 6Growth
 Growth in sales is usually—but not always—a positive sign. A

$16 million injection-molding company, writes Charan, “rewarded its sales representatives

based on how many dollars’ worth of plastic caps they sold, regardless of whether the company made a profit on the caps.
Growth Growth in sales is usually—but not always—a positive sign. A $16 million injection-molding company, writes Charan, “rewarded

Слайд 7Everyone was excited when the company landed $4 million in

new sales from two major customers. But in the following

three years, as sales rose, profit margins sank.” The lesson here: “Growth for its own sake doesn’t do any good. Growth has to be profitable and sustainable.”

Everyone was excited when the company landed $4 million in new sales from two major customers. But

Слайд 8Cash generation
Cash is “a company’s oxygen supply,” writes Charan; it

“gives you the ability to stay in business.” Even if

your company is growing its revenues profitably and getting a respectable return on its assets, a cash shortage—or a declining cash flow—spells trouble.

Cash generationCash is “a company’s oxygen supply,” writes Charan; it “gives you the ability to stay in

Слайд 9“Cash generation is the difference between all the cash that flows

into the business and all the cash that flows out

of the business in a given time period,” Charan explains. Since most companies extend and receive credit, net cash flow and profit are seldom the same thing.
“Cash generation is the difference between all the cash that flows into the business and all the cash

Слайд 10Cash from operations depends largely on two factors:
 accounts receivable (money owed

by customers)
and accounts payable (money owed to suppliers).

Cash from operations depends largely on two factors: accounts receivable (money owed by customers) and accounts payable (money owed to suppliers).

Слайд 11Consultant Ram Charan, author of What the CEO Wants You to

Know, urges you to “get a total picture” by answering the

following questions:

What were your company’s sales during the last year? Are sales growing, declining, or flat?
What is the profit margin? Is it growing, declining, or flat?
How does your margin compare with those of competitors? With those of other industries?
Do you know your company’s inventory velocity? Its asset velocity?
What is its return on assets?
Is cash generation increasing or decreasing? Why?
Is your company gaining or losing against the competition 

Consultant Ram Charan, author of What the CEO Wants You to Know, urges you to “get a total picture”

Слайд 12Charan recommends continually investigating where the cash is being generated,

how it’s being used, and whether enough is coming in.

If there’s not enough, of course, you’ll want to find out the reasons.

Charan recommends continually investigating where the cash is being generated, how it’s being used, and whether enough

Слайд 13Return on assets (ROA)
 A company’s ROA is its net profit

divided by the average value of its assets during a

given period of time. This measure, usually expressed as a percentage, shows you how well your company is using its assets—including cash, receivables, inventory, buildings, vehicles, and machinery—to make money.
Return on assets (ROA) A company’s ROA is its net profit divided by the average value of its

Слайд 14ROA gives managers a glimpse of the often-missing third element

of a triad called SEA: sales, expenses, and assets.

ROA gives managers a glimpse of the often-missing third element of a triad called SEA: sales, expenses,

Слайд 15“Below the senior management level,” explains Chuck Kremer, a financial

trainer and coauthor of Managing by the Numbers, “many decision makers see

only their part of the income statement,” which doesn’t deal with assets.
“Below the senior management level,” explains Chuck Kremer, a financial trainer and coauthor of Managing by the Numbers, “many

Слайд 16Many people equate managing assets with watching gross profit (total

sales minus all costs directly associated with creating the company’s

products or services). That’s only half the challenge, says Charan.
Many people equate managing assets with watching gross profit (total sales minus all costs directly associated with

Слайд 17The other measure that needs to be monitored simultaneously is velocity—

how fast a particular asset moves “through a business to

a customer.”
The other measure that needs to be monitored simultaneously is velocity— how fast a particular asset moves “through

Слайд 18In times of intense price competition, for example, companies often

see their gross margins shrink. Increasing asset velocity helps protect

the ROA of a company in that situation, because you’re doing more with fewer assets.
In times of intense price competition, for example, companies often see their gross margins shrink. Increasing asset

Слайд 19Dell cut costs by reducing inventory and increasing its inventory turns

- the number of times in a year that its

inventory turned over - to a level far higher than most manufacturers’.

Dell cut costs by reducing inventory and increasing its inventory turns - the number of times in a

Слайд 20“The problem with managers missing the ‘A,’ or assets part

[of SEA], isn’t usually apparent in good times,” Kremer says.

“It’s when things are slowing down that ROA makes all the difference. And it’s the companies like GE that emphasize the ‘A’ continuously - so that their people are always managing the receivables, the fixed assets, and the inventories - that thrive in good times and bad.”
“The problem with managers missing the ‘A,’ or assets part [of SEA], isn’t usually apparent in good

Слайд 21 Think Like an Owner
By understanding growth, cash generation, and ROA,

managers can counteract the common tendency to think and act

within one’s “silo” (department or unit). “None of us denies that we’re members of a team comprising every department,” Kremer says. “But how can I best contribute to the team if I don’t understand how my actions in marketing impact engineering or production?”
 Think Like an OwnerBy understanding growth, cash generation, and ROA, managers can counteract the common tendency to

Слайд 22Tracking these financial measures helps expand managers’ thinking in three

ways, says Charan:
“First, we’re able to think of the

business as a whole.
Second, we see the linkages between our unit and the business as a whole.
Tracking these financial measures helps expand managers’ thinking in three ways, says Charan: “First, we’re able to

Слайд 23Third, we’re better able to grasp what’s happening in the

outside world - such as an economic slowdown - and

relate that to the company and even to our own area.”
Third, we’re better able to grasp what’s happening in the outside world - such as an economic

Слайд 24A big-picture understanding of basic financial measures has very practical

benefits, says Thomas Kroeger, the executive vice president in charge

of organization and people at Office Depot. “The main benefit is that it helps us cut through the clutter,” he says, noting that Office Depot’s fast growth necessarily created layers and distance between the CEO and store managers.
A big-picture understanding of basic financial measures has very practical benefits, says Thomas Kroeger, the executive vice

Слайд 25Kroeger describes a telling incident that occurred during a meeting

of district store managers, who had suggested that each store

hire a customer greeter. At the individual store level, this didn’t represent a huge financial commitment. But when the managers took a step back, they realized that their idea would cost $25 million annually to execute. “They were dumbfounded,” Kroeger recalls. “But they’d experienced a critical shift, from the perspective of store manager to store owner.”

Kroeger describes a telling incident that occurred during a meeting of district store managers, who had suggested

Слайд 26At Alcoa Packaging Machinery in Englewood, Colorado, a financial-literacy initiative

helped foster an owner’s perspective among all employees. “Workers in

each of about 10 manufacturing cells make the decisions that affect them,” explains machinists’ union representative Garry Harper. Should we work this Saturday? Should we buy the new tooling we need this month?

At Alcoa Packaging Machinery in Englewood, Colorado, a financial-literacy initiative helped foster an owner’s perspective among all

Слайд 27The company’s big picture gets factored into the decision making

around such questions. What’s more, all employees receive monthly updates

on key financial measures of companywide performance at cell briefings and via the company’s intranet. “Every cell also gets its own monthly.
The company’s big picture gets factored into the decision making around such questions. What’s more, all employees

Слайд 28P&L statement,” Harper adds. “I can assure you that every

employee knows or has access to how well his or

her cell is contributing to overall company performance.”

P&L statement,” Harper adds. “I can assure you that every employee knows or has access to how

Слайд 29Growth, cash generation, and return on assets—these concepts, along with

a focus on customers, form the nucleus from which everything

else about a business emanates, says Charan.

Growth, cash generation, and return on assets—these concepts, along with a focus on customers, form the nucleus

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