Effective management — the way to increase the companies profitability
By Natalia Shevchenko, Partner at Otten Consulting
The question of efficiency improving is becoming a matter of survival for many companies, especially in an unstable economy. Is it possible to increase business profitability through effective management, planning and control? What tools can help to manage resources most efficiently? We will try to find answers to these questions in this article.
For more than 12 years of experience as consultants for foreign companies in Ukraine, having experience and knowledge about the work of Ukrainian business, we can confidently say: effective management is not a panacea for all business problems, it’s for sure, but it’s a big application for success, stability and reliability of the business. So what are the tools that help — more on that in this article.
Financial Planning and Budgeting
Planning a business for the near future or for the forward-looking is a description of prospects often in quantitative or percentage terms, such as an increase in the number of sales to 2 million units per year, or an increase in the average check by 20%. For a new project or business, planning is the creation of a business model or a complete business plan. Financial planning is about specific monetary indicators when there is a more detailed description and calculation of possible income and expenses, financial flows, expectations of a financial result.
A financial plan helps evaluate the resources available and what resources need to be further found to implement the plans. A financial plan is a forecast, an assumption. It will never come true 100%, and at the same time it is still important, because sets more specific indicators and makes it possible to look for solutions in advance. For example, if a business was faced with cash shortages (cash gap), then cash flow planning was either absent or inaccurate, so the business was not prepared for planned payments.
When the forecast is compared with the actual implementation of the plan and the reason for the discrepancies is analyzed, this is already the budget. Budget analysis helps to understand whether the company has achieved its goals. Comparison of the plan with reality helps to influence the result, look for possible options for adjusting work processes.
As a financial tool, the budget is very important for top managers and investors, because it provides:
- quantitative goals;
- allocation of resources;
- performance measurement;
- results of work;
- information on available and used resources and the like.
It also happens that there is a budget, but it does not help to manage, but only adds work. This happens when managers entrust the accountant with budgeting, ignoring those who are involved in the creation of cash flows. For example, a sales plan is drawn up by a manager, ignoring the opinion of the commercial director, an equipment overhaul plan is drawn up by an accountant, not the head of the technical department, or a marketing plan is made by a secretary instead of the head of the marketing department. There is a tool, but it is involved inefficiently, and therefore does not work. Because the one who affects the cash flow is not responsible for the preparation of the plan and, most likely, is not responsible for its implementation.
Each department or unit should plan and be responsible for the implementation of the financial plan. By implementing a budget, you improve discipline.
Controlling and Control
We all know what control is. Control is to maintain all processes and check the results. Control identifies problems, gaps and weaknesses, but works with past actions and facts. But this is not always effective, since in this case we only work with the consequences, but in general the situation does not change.
It’s more efficient to work on what will improve processes where possible, that eliminates undesirable consequences. And this is the task of controlling. Controlling is about business transparency and its results, about the analysis of various options, it is intended to prevent problems and/or errors.
The cycle of the controlling procedure looks like this:
- first the goal is determined and the way how this goal can be achieved (several alternatives);
- setting key indicators, standards, norms, etc., by which we evaluate possible options;
- the scenarios of each of the options are calculated, and the most suitable one is determined by a set of criteria;
- during the implementation of the selected scenario or immediately after it, the plan is compared with the fact (performance, quality, requirements, etc.);
- deviations are recorded, the causes of these deviations (if any) are identified;
- an analysis is made of how the deviation affects the results and goals, and whether it is possible to influence such deviations, correct what works incorrectly, fix the best practices in the future, if possible;
- measures are being taken to minimize risks and optimally achieve goals.
Accounting department is rarely able to help you in this scenario, as the accountant lives on with past events, he/she is pedantic, conservative, thinks about “every penny. Such people are just needed in accounting, but it is difficult for them to operate with approximate data. An accountant can give statistics, bring together already existing data, but not predict. The excessive attention of accountants to primary documents protects the company during tax audits and when working with contractors, but complicates their comprehensive understanding of abstract plans. Here we need a different mindset and nature.
Therefore, to obtain operational information and organize controlling, innovative solutions and a person who combines the functions of a manager and a financier are required. The managers partially perform such functions themselves, but this is the reason that the leader is engaged in micro-management and does not have time for strategic issues and the development of the company. Our experts combine both functions, but this is more likely a rarity than a rule.
The economic thinking of the leader
It is very important for the leader to see the business as a whole and in its interconnections, to systematically approach decision-making both in strategic issues and in daily work. For example, a company has identified a problem (pest on crops). The easiest option for an agronomist is to use the appropriate chemicals. But it would be more effective to first consider what would be more beneficial for the company — to use expensive chemicals, bring people to the field, pay them salaries and spend fuel or do nothing?
To answer this it is needed to analyze and answer the questions:
- How much yield will a company lose if not to respond?
- Will this affect the quality of the product as a whole?
- If you do not respond — what financial result (decrease in profit) are we talking about?
- How much does it cost to process crops and stop the disease (pest)?
- Will the company save money if it responds and incurs additional expenditure?
And such questions can be asked by any department head or executor. Do you often think so? And your subordinates who make decisions in their places?
The economic style of thinking needs to be taught to managers at all levels. How exactly to do this is up to you to decide in your company, there isn’t the only right scenario.
Involving consultants is the most effective and fastest way to get a look from the outside and get professional advice. We don’t pay attention to many things when we see them every day. Consultants have no personal interests (if they are objective and independent), so they objectively perceive the reality and relations among the employees in the team.
At the same time, all internal changes can be made only with a team of enthusiasts or at least one who will lead others. Such an employee must have authority directly from the owners and report to them.
As world practice shows, failure to implement projects or ideas does not occur on technical or managerial level. You can perfectly draw a picture, but it will not become real without the support of people.
So what to do?
Effective resource management can significantly increase the profitability of companies. And there are many examples. No matter how many resources you have, there always be not enough of them if you cannot properly dispose them. Correct disposition is the goals and their financial reflection, and making calculated financial decisions every day.
Three pillars of effective management are planning (strategic and financial), controlling (with its part — control) and and the economic thinking of your staff, its interest in the end result of your business. It cannot be said precisely which of these pillars is the most important because they only work together. They guarantee movement in a given direction, with set goals, with the correct distribution of capacity and resources, and with people who timely inform about the important and prudently perform small tasks by themselves.