The Savant Business Management System harmonizes the 5 most critical areas of your business – Foundation, People, Strategy, Execution, and Control. With all companies, the last four areas must sit atop a foundation and that foundation is comprised of your company’s leadership team alignment, meeting effectiveness, leadership mindset, and your company’s purpose, values, and culture which we addressed in the first two postings. In our last four posts we discussed People, and more specifically the Employee Experience, Organizational Health, Functional and Process Accountability. We also discussed Strategy and its Strategic Thinking and Execution Planning components; then we discussed Execution with an emphasis on the importance of Measurables, Key Processes, and Meetings (Leadership Team, 1:1s, and Career Development). We will finish this blog series with a discussion about Control, including financial statement analysis, the importance of cash, and data management (Company Scoreboards and Individual Scorecards).

Financial Statement Analysis

The income statement, balance sheet, and cash flow statement are three essential financial statements used by businesses to communicate their financial performance and position to various stakeholders, including investors, creditors, and management. These statements provide different perspectives on a company’s financial health and activities. Let’s explore their relationships and purposes:

Income Statement (Profit and Loss Statement):

The income statement presents a company’s revenues, expenses, and net income (or net loss) over a specific period, usually a quarter or a year. It shows how well the company performed in generating profit from its core operations during that period. The income statement includes:

Revenues (Sales): The total income generated from selling goods or services.

Cost of Goods Sold (COGS) or Cost of Sales: The direct costs associated with producing goods or services.

Gross Profit: Calculated by subtracting COGS from revenues, representing the profit from core operations.

Operating Expenses: Indirect costs like salaries, marketing, rent, and other operating costs.

Operating Income (Operating Profit): Calculated by subtracting operating expenses from gross profit.

Other Income and Expenses: Non-operational items like interest income, interest expenses, and taxes.

Net Income (Net Profit): The final result after subtracting all expenses from revenues.

Balance Sheet (Statement of Financial Position):

The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It presents the company’s assets, liabilities, and shareholders’ equity. The balance sheet follows the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity. The balance sheet includes:

Assets: Resources owned by the company, categorized into current assets (e.g., cash, accounts receivable) and non-current assets (e.g., property, equipment).

Liabilities: Debts and obligations owed by the company, categorized into current liabilities (e.g., accounts payable, short-term debt) and non-current liabilities (e.g., long-term debt).

Shareholders’ Equity: Represents the residual interest in the company’s assets after deducting liabilities. It includes common stock, retained earnings, and additional paid-in capital.

Cash Flow Statement:

The cash flow statement tracks the movement of cash into and out of a company during a specific period. It helps assess the company’s ability to generate and manage cash flows. The cash flow statement is divided into three sections:

Operating Activities: Shows cash flows from the company’s core operations, including cash received from customers and cash paid to suppliers and employees.

Investing Activities: Includes cash flows related to the acquisition and disposal of long-term assets, such as property, equipment, and investments.

Financing Activities: Tracks cash flows from transactions with shareholders and creditors, like issuing or repurchasing stock, and borrowing or repaying debt.

Relationship between the financial statements:

The net income reported on the income statement is used to calculate the operating cash flow in the cash flow statement and is also a component of shareholders’ equity on the balance sheet.

Changes in certain balance sheet items (like accounts receivable and accounts payable) impact cash flows reported in the cash flow statement. The ending cash balance on the cash flow statement is often reconciled with the cash and cash equivalents reported in the balance sheet.

In summary, these three financial statements are interconnected and provide a comprehensive understanding of a company’s financial performance, position, and cash flows. Analyzing these statements together enables stakeholders to make informed decisions about the company’s health, growth prospects, and financial stability.

Use of Cash in the Cash Conversion Cycle (CCC)

The cash conversion cycle is a crucial financial metric that helps businesses like yours manage their working capital efficiently. Essentially, it provides insight into the time it takes for your company to convert its investments in raw materials and resources into cash flows from sales.

Here’s why the cash conversion cycle is so important:

Working Capital Management: The cash conversion cycle gives you a clear picture of how efficiently your company is utilizing its working capital. By understanding how long it takes for your investments in inventory, production, and accounts receivable to turn into actual cash, you can make better decisions about managing your day-to-day operations and optimizing your working capital.

Liquidity Management: Maintaining a healthy cash flow is essential for any business. The cash conversion cycle helps you identify potential liquidity gaps or surpluses. If the cycle is too long, it means your company might be tying up cash in inventory or waiting too long to collect payments, which could lead to cash flow problems. Conversely, a short cycle might indicate you’re not investing enough in inventory to meet customer demand.

Inventory Control: The cycle sheds light on how efficiently you’re managing your inventory. Holding excess inventory ties up your capital, while low inventory levels might result in missed sales opportunities. The cash conversion cycle helps you strike the right balance by optimizing your inventory turnover rate and avoiding excess carrying costs.

Accounts Receivable: If your company offers credit terms to customers, the time it takes for them to pay you impacts your cash conversion cycle. Monitoring this aspect helps you assess your credit policies, customer payment behavior, and the effectiveness of your collections efforts. A shorter accounts receivable period means you’re getting paid faster, which can positively impact your cash flow.

Suppliers and Accounts Payable: Efficient cash management involves not only collecting payments but also optimizing your payments to suppliers. A longer payment period to suppliers can help you preserve cash in the short term, but it’s essential to strike a balance that maintains good relationships with your suppliers and avoids disruptions in your supply chain.

Business Performance Evaluation: The cash conversion cycle is a valuable tool for assessing your company’s operational efficiency over time. Comparing the cycle’s changes across different periods can reveal trends and areas that need improvement. By continually optimizing this cycle, you can enhance your company’s financial performance and competitiveness.

The cash conversion cycle is a critical metric that provides insights into how effectively your company manages its working capital and cash flow. By understanding and actively managing this cycle, you can make informed decisions to optimize inventory levels, streamline accounts receivable and payable processes, ensure liquidity, and improve overall operational efficiency. This, in turn, contributes to your company’s financial health and long-term success.

Company Scoreboards and Individual Scorecards

Company Scoreboards and Individual Scorecards are management tools used in organizations to track and measure performance, both at the organizational level and at the level of individual employees. They provide a visual representation of key performance indicators (KPIs) and metrics that are important for the success of the company and its employees. These tools help in monitoring progress, setting goals, and making informed decisions to improve performance and achieve desired outcomes.

Company Scoreboards: A company scoreboard, often referred to as a “dashboard” is a visual representation of various performance metrics and KPIs that give an overview of the organization’s health and progress towards its strategic objectives. It provides a snapshot of key information that helps top management, executives, and stakeholders understand how the company is performing and whether it’s on track to achieve its goals.

Company scoreboards typically include metrics related to financial performance (e.g., revenue, profit margins), operational efficiency (e.g., production output, customer satisfaction), growth (e.g., market share, new customers), and other strategic areas relevant to the business. The data on these scoreboards can be updated in real-time or at regular intervals, allowing for quick decision-making and course corrections when necessary.

Individual Scorecards: Individual scorecards, also known as employee scorecards or performance scorecards, are tools used to measure and manage the performance of individual employees within the organization. These scorecards are based on specific job roles, responsibilities, and key performance indicators relevant to each employee’s role.

An individual scorecard outlines the goals, targets, and metrics that an employee is expected to achieve within a given period. These goals should be aligned with the company’s overall objectives and may cover areas such as productivity, quality of work, customer service, teamwork, and professional development. The scorecard allows both the employee and their supervisor to track progress, assess performance, provide feedback, and identify areas for improvement.

Individual scorecards should be used as a part of performance management, which involves setting expectations, monitoring progress, providing regular feedback, and conducting performance reviews. These scorecards can contribute to employee motivation, alignment with company goals, and the identification of training or support needs.

Key Differences:

Scope: Company scoreboards focus on the overall performance of the organization, while individual scorecards focus on the performance of individual employees, groups, or teams within their respective roles or areas of responsibility.

Metrics: Company scoreboards display high-level metrics that reflect the health and performance of the entire organization. Individual scorecards include metrics that are relevant to individual employees, groups, or teams within their respective roles or areas of responsibility..

Audience: Company scoreboards are typically meant for top management, executives, and stakeholders who need an overview of the company’s performance. Individual scorecards are used by employees and their supervisors for performance management and improvement.

Purpose: Company scoreboards aid in strategic decision-making, goal alignment, and tracking progress toward organizational objectives. Individual scorecards facilitate employee development, goal attainment, and performance improvement.

Frequency: Company scoreboards might be updated periodically to reflect performance trends, whereas individual scorecards could be reviewed more frequently to provide ongoing feedback and support.

Company scoreboards and individual scorecards are essential tools in organizational management. They offer insights into different levels of performance and contribute to improved decision-making, goal achievement, and overall success.

 

Conclusion

We have reached the end of this initial blog series covering the Savant Business Management System. In summary, we covered the fundamental importance of leadership team alignment, meeting effectiveness, mindset, purpose, values, and culture. We then reviewed the People and Strategy areas of your business with our discussion on Employee Experience, Organizational Health, Functional and Process Accountability, Strategic Thinking and Execution Planning. And finally, we covered Execution and Control.