The task of the managing director is to maximize the operational result of the managed company in all circumstances. To fulfill this task, the managing director needs sufficient up-to-date information. This large body of information contains at least: basic reporting, future forecast and information on the internal and external trends of the business. Information on the performance of the company managed is always necessary in order to ensure adequate competitiveness.
Basic reporting compares actual performance to the budget, forecast or some other set goal. I have written on this subject before in the article management reporting. The starting point is that an adequate amount of reports and information is available on the examined period.
Unfortunately, I have often encountered a situation, where this information has not been available, but instead the company has been managed based more on beliefs than facts. I was attending a meeting of the management group, where the managing director of the company was presenting the operations. He told, that they have a “number-one product” that they are well-known in the markets for. I asked about the profitability of the product, and the managing director answered that the product is very profitable. I asked for more detailed information, and the managing director answered that up-to-date, product-specific profitability information is not available. The management group then decided to conduct product-specific profitability analysis for the main products. The process was implemented by also dividing all fixed costs between the products, so that the end result was a product-specific EBITDA for analysis. The EBITDA of the company’s “number-one product” was – 43 %. The product was discontinued, and this action improved the EBITDA of the whole company 2 %. Therefore, only one product had a dramatic effect on the overall profitability of the company.
When there is enough information available, it is still necessary to be able to analyse the information with sufficient accuracy. Some companies produce massive amounts of reports, without anyone having the ability to tell, in a concise way, what all these reports actually mean. Therefore, the essential task is the consolidation and analysis of existing information. Only information that has been analysed in a sufficiently profound manner enables making the right conclusions and planning the necessary actions.
In addition to looking through the rear-view mirror, the managing director should have a realistic view on the future of the business. This is an essential precondition for up-to-date management. The managing director must be able to steer the company in tailwinds, and also when the ship must be steered safely past reefs and narrows.
Forecasting is seen as challenging and difficult, and it certainly is unless conducted in a systematic manner. When the forecasting process has been developed to function systematically and with enough simplicity, up-to-date and realistic views on the future of the business can be obtained with relatively small effort. Forecasting has been covered to reasonable extent in our previous articles: profit forecast, sales forecastand cash flow forecast.
A good example here is a start-up company, with the turnover growing by a factor of 2 – 3 annually. The rate of growth means that the company will run out of funds, even though the business as such is profitable. The growth ties down so much working capital, that a separate, timed programme of actions is required for capital management. If (and, all too often, when) the acquisition of working capital is initiated only after the money has ran out, the process is initiated way too late. This kind of operation sends a message of unplanned management in the company to the financiers and/or private equity investors.
A trend, by definition, is the direction of some phenomenon. In this presentation, a trend is understood as a trend in the field of operation and markets of the company (external trends), and directions relating to the operation and actions of the company (internal trends) that span longer periods, and the changes that occur in these. These may include, for example:
- Life cycle of products and/or services
- Unit costs of products and/or services
- Changes in different areas of business in
- share of total business volume
- Changes specific to an area of business
- Changes in consumption patterns
The company management must be able to continuously sense changes in the market, so that timely reactions are possible. One well-known example of this is Kodak, which did not react to the digital change in photography market in time, and the company did not end well. The company had an employee working in product development named Steven Sasson, who invented a digital camera already in 1975. The board of the company considered it a toy, and when Sasson proposed investing in the development of this product, he was met with laughter. Later, in 2012, the company filed for bankruptcy protection.
Significant changes in the demand for the company’s product or service are the last sign that something dramatic is occurring. Systematic monitoring and analysing different trends is an important part of professional business management.
The task of the managing director is to implement the strategy confirmed by the board of directors. At the same time, the operative performance of the company should be optimized. Good performance means:
- low/competitive production costs
- systematic and flawless business processes
- the competitive advantage on the markets resulting from the above
To monitor the implementation of the strategy, measures that indicate the realisation of goals are created. The entity constructed using the measures is referred to as a Balanced Scorecard (Kaplan and Norton, 1996). To gather the information for the measures, different tools are used by companies. The most advanced systems are PM (Performance Management) systems, which produce the necessary information and measure data. A functional PM system collects data on critical Key Performance Indicators and produces measures based on them. In the Balanced Scorecard model, economic, customer, process and personnel viewpoints are synchronised to function in a balanced way, and to indicate the implementation of the company’s strategy.
Other, alternative models for measuring performance and implementation of strategy include different types of quality systems and the Lean method. Lean method is focused on removing all unnecessary elements from processes and to shorten lead times.
A good example of this subject area is a manufacturing company with an excellent history of success. As years passed, the life cycle of the company’s products was nearing end, and new products could not replace the volumes or margins that the old products had. The overall volume decreased, which meant that an increasing share of “fixed costs” of manufacturing was divided on individual products as utilisation rate fell. This caused the company’s sales margin, and ultimately also net profit, to collapse, until after profound (but late) situation analysis, corrective measures were initiated. After a lengthy period of heavy restructuring, the situation was finally remedied and the company steered back on the course of profitable business.
The information described above provides a good basis for understanding and analysing what are the core parts of business and what parts are better to outsource. At the same time, a good outlook is obtained on what provides the most competitiveness, and how the utilization of the company’s resources can best be optimised. I have written on this subject in my article describing core business. The most optimal business model producing the best results focuses the internal operations of the company on matters and areas that produce the greatest competitive advantage to the company.
An example is a start-up company that, by definition, multiplies its turnover regularly. Here, the allocation of the entrepreneurs’, owners’ or innovators’ time is the scarcity factor requiring constant focusing of operations of the company. This scarce resource should be focused on conducting only the most important core tasks.
When the managing director has access to the information described above, the tools for making the necessary decisions are adequate. At the same time, the information provides a good basis for board work and stakeholder reporting. Revise Oy specializes in building professional management tools. Contact us, and let us see how we could help you.