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The 'one number' approach to business transformation
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The ‘One Number’ Approach to Business Growth: Balancing Sales & Resources
Where’s your profit?
£ Financials
Operations Sales & Marketing
1
number
Connects
3 critical
business areas
The ‘One Number’ Approach to Business Transformation
Value Added for the Critical Resource Limitation
= VA/CRL
Critical Resource Limitation
The ‘Critical Resource Limitation’ is the ONE thing that will put a brake on your growth!
Consider these examples:
• Football stadium• Racing circuit• Supermarket• Fast food outlet• Fine restaurant• Whisky bottler
• Hairdresser• Machine shop• Antique clocks• Professional services• Office supplies• Your business ??? (If
everything is working perfectly, what are you going to find it most difficult to get more of?)
£ Financials
Operations Sales & Marketing
1
number
Connects
3 critical
business areas
Critical Resource Limitation Connections
Critical Resource Limitation
Connecting to the CRL through the Break-Even Point
Connecting to the CRL through what we have to do in the market place to deliver on the target
Financial Link to the Critical Resource Limitation
The Break-Even point is that turnover figure that will result in a profit that exactly balances the overheads:
Break-Even Point =
OverheadsGross Margin %
But we don’t want to break even do we?
Financial Link to the Critical Resource Limitation
If Break-Even turnover is >90% of actual = then very high probability of failure
If Break-Even turnover is between 80 – 90% of actual then probable survival – but difficult to grow
If Break-Even turnover is <80% of actual then survival is likely and self-funded growth is possible
Critical Resource Constraint
The ‘Critical Resource Limitation’ is the ONE thing that will put a brake on your growth!
Consider these examples:
• Football stadium• Racing circuit• Supermarket• Fast food outlet• Fine restaurant• Whisky bottler
• Hairdresser• Machine shop• Antique clocks• Professional services• Office supplies• Your business ??? (If
everything is working perfectly, what are you going to find it most difficult to get more of?)
Dec 2007
Sales £350kCost of sales £258kGross profit 26% £ 92kOverheads £190kLOSS (£97K)
Value added/litre = £1.53(The critical resource was 60,000 litres of whisky
which made only £92,000)
Financial Link
Financial Link
1. Overheads = £190,0002. Critical Resource Limitation = 60,000 litres
Value Added to Break Even = ½£190,000
60,000 litres= £3.16
Value Added Target = £3.16/90% = £3.50
Financial Link
Old St. Andrews Whisky...
Added Value c £15.00 per Litre
TOTAL £900,000
If the break-even point was £3.15 where would YOU
focus….?!
CRITICAL RESOURCELIMITATION
60,000 litres of whisky
Added Value c £1.00 per Litre
TOTAL: £60,000
Financial Link
Old St. Andrews Whisky...
Added Value c £15.00 per Litre
TOTAL £900,000
If the break-even point was £3.15 where would YOU
focus….?!
CRITICAL RESOURCELIMITATION
60,000 litres of whisky
Added Value c £1.00 per Litre
TOTAL: £60,000
Gross Margin was 26% in
BOTH cases!
Sales & Marketing Link to the Critical Resource Limitation
You are looking for PRODUCT and CUSTOMER
COMBINATIONS
That will maximise the Value Added for the Critical Resource Limitation
Sales & Marketing Link
Dynamic Pricing:
Litres % Resources VA/litre Gross Profit % Profit
Platinum 6,000 10% >£5.00 36,000£ 17%
Gold 12,000 20% £4.00 - £5.00 54,000£ 26%
Silver 24,000 40% £3.00 - £4.00 84,000£ 40%
Bronze 12,000 20% £2.00 - £3.00 30,000£ 14%
Lead 6,000 10% <£2.00 6,000£ 3%
60,000 210,000£
Average Value Added per Litre = 3.50£
Applying the Value Added per Critical Resource Limitation
Dec 2007
Sales £350kCost of sales £258kGross profit 26% £ 92kOverheads £190kLOSS (£98K)
Value added/litre = £1.53
Dec 2008
Sales £501kCost of sales £289kGross profit 42% £ 211kOverheads £161kProfit 10% £ 50k
Value added/litre = £2.69
Your World Example Workshop
• What does the P&L account look like?• Deal with false P&L/Balance sheet cost allocation• What is the Critical Resource Limitation and how
much of it is there• What is the break even point for the CRL?• What is the target value for the CRL?• Good job or bad job?
Sales/Profit/Break-EvenTracking Tools
£Sales GM% VA/L VA/L Av Litres Litres Rem £GP GP RemBudget Wk 3.50£ 1,200 4,200£ Order 1 400£ 25.0% 1.67£ 1.67£ 60 1,140 100£ 4,100£ Order 2 1,000£ 40.0% 40.00£ 7.14£ 10 1,130 400£ 3,700£ Order 3 2,000£ 50.0% 1.92£ 2.54£ 520 610 1,000£ 2,700£ Order 4 2,000£ 25.0% 2.50£ 2.53£ 200 410 500£ 2,200£ Order 5 1,500£ 45.0% 3.38£ 2.66£ 200 210 675£ 1,525£ Order 6 3,500£ 48.0% 18.67£ 3.63£ 90 120 1,680£ 155-£ Order 7 400£ 70.0% 7.00£ 3.33£ 40 80 280£ 435-£ Order 8 100£ 30.0% 1.00£ 3.11£ 30 50 30£ 465-£ Order 9Order 10
Will it work in the construction industry?:
MHS Homes Construction Division turning over £10m a year and losing £120k per month for last 15 months– July – September introduction of the ‘One Number’
approach– October PROFIT £40K for the month– Following year PROFIT £350K– Last year PROFIT £800K
‘I was astonished... This was the fastest and most complete transformation from loss making to
profitability that I have ever seen’ Ashley West (Non-Executive Director MHS)
5 Steps to Business Transformation:
1. Determine your Critical Resource Limitation2. Establish your TRUE overhead3. Work out your Break-Even and Target Value Added
for your Critical Resource Limitation4. Figure out your CUSTOMER x PRODUCT marketing
COMBINATIONS to maximise VA/CRL5. Flex pricing & track progress
One Rule: Maximise the Value Added for your Critical Resource Limitation in everything you do!
5 Steps to Business Transformation:
If You Only Take AwayOne Thing From Today...
The key to increasing profitability and relaxing the organisation is:
NOT Gross Margin %But
Maximising the Value Added for the Critical Resource Limitation!
That’s all folks…
Bob Gorton
01474 872152
HARD HAT Business AdviceThe Enterprise Centre, 55 Redhill Wood
New Ash Green, Longfield, Kent DA3 8QP