Слайд 1The Fundamental Laws of Business
Get a grip on any
company, regardless of size or location.
Prepared:
Phd Kargabayeva Saule Toleouvna
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?
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.”
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.”
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.
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.
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.”
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.
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.
Слайд 10Cash 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
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.
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.
Слайд 14ROA gives managers a glimpse of the often-missing third element
of a triad called SEA: sales, expenses, and assets.
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.
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.
Слайд 17The other measure that needs to be monitored simultaneously is velocity—
how fast a particular asset moves “through a business to
a customer.”
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.
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’.
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.”
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?”
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.
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.”
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.
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.”
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?
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.
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.”
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.