mikelally.net

Last week, I started as series of posts detailing my thoughts on how I would fix or turn around a business operation. Inspired by a promising MBA student that is doing an internship with us, I thought I would take a stab at a scenario she threw at me.

This week, let’s talk about financials. I am taking an operational view. Maybe a business unit, maybe a small company. In some scenarios, you may not get access to the financials. I like to focus on a few areas:

• Revenue
• Operating Costs
• Profit
• Contribution margin
• Days Sales Outstanding (DSO)

Ultimately, I want to understand profitability by customer. I want to know who my most profitable customers are and I want to know who is killing me. Down the road, we will make decisions. Sometimes, customers need to get fired. Crazy. I know. But why would you do business with someone that is costing you money? Charge them more or get rid of them. Unless they are “strategic” – i.e. bringing you HORDES of profitable customers.

I don’t think anyone can be running pure COST CENTERS any more. Every unit should be finding a way to become a profit center. Either way, cost or profit center, you have to understand where the money is going. Detailed operating costs. I promise you there is waste. Find it. Create a bonus plan that rewards people for finding new ways of doing things. Make it so that it comes directly to you and not through a chain of command. Don’t let a middle manager feel threatened and stomp down a great idea.

Contribution Margin is a KPI I also like to examine. Simply put, it is total product price less its variable costs. This really gets at the profitability by customer KPI. You can break this number down many different ways. By customer. By product. By team. It helps drill down into potential trouble spots.

Then, there is DSO. This one has always amazed me. I have been in several operations where payments from customers have lapsed to 90+ days. 120+ days. How is that possible? It happens. One goal is to start closing the gap on DSO. If your standard terms are net 30. Your cash flow is being affected. Plus the conversation required with your customer is worth it for a couple of reasons. First, it is a good to talk to your customers. Second, if they are really late, maybe they have a business problem you might be able to fix.

What is costing us money? Where are we profitable? These are the two big questions that I seek answers to in a turnaround situation. Next steps are to figure out ways to align costs and customers better. Can you charge customers more for the products/services delivered? Can you cut costs? Are there process inefficiencies (more on that later)?

I avoided the obvious cash flow and balance sheet pieces. There are plenty of better places to get that information. I am taking an operational – line management – view. My goal is to show how I would pull apart an operation, dissect it, and then build it back up for greatness.

Next time, we will talk about the Employee Side KPIs. (I will try to do better on timing. This was a holiday week for me. Things got a little nutty.)