Vision as a management tool
A vision is a realistic, motivating and desirable future goal. Its purpose is to motivate the personnel involved in reaching the set vision of future. A well-made vision is in sync with the company’s mission, values and the strategy that has been built or is in the process of being designed. In this article, the focus is on a numerical vision that enables constructing shorter-term operational and change programs that implement the vision.
A simple way to make a numerical vision is to present figures from several years parallel to each other, including historical, present and projected future figures. When all this information is condensed into one or two tables, it presents a good overview of the business’ historic trends and the effect of planned actions on overall profitability, various key indicators, balance sheet etc. It is also an excellent tool for management and information sharing. It represents a single overview of the company’s story and plans.
An example of utilizing vision
This approach is best described with a concrete example. The example company has been operating as a sales company in its business area, and has historically been very profitable. Challenging times started after acquisition of another company in 2013.
The below table presents the profit and loss statement history of the example company, a forecast of the current financial period and the vision created by the company’s management, extending until 2020.
The turnover of the company has increased strongly in 2014 after the acquisition in 2013. The goal of the acquisition was increasing business growth and securing necessary resources for strong future growth. However, the planned synergy benefits (efficiency through cost savings and/or increase in volume) have not been realized. Fixed costs have risen to a very high level, and turnover has grown only slightly since 2014.
Relative gross margin (32.0% in 2014) has decreased in 2015 – 2016, but is still relatively high, about 30%. From a profitability perspective, the greatest challenge is therefore the relative fixed costs that are too high, meaning that with the present costs level the company should have a turnover of ca. 21,5 M€ to achieve a healthy operating profit. After the acquisition, the business has been heavily loss-making in 2014 – 2016, measured as net result, and according to the forecast, also the net result for 2017 will be negative.
The company management has created a turnaround plan to break the cycle of loss. Vision for years 2018 – 2020 (above) is used as a tool for visualizing the plan, describing numerically the changes to be implemented.
The goal is to increase the company’s relative gross margin compared to years 2015 – 2017, while simultaneously achieving a moderate increase in volume. The relative fixed costs of the company have increased in 2014 – 2017, exceeding the gross margin in 2015 and 2016. This means that measured by operating margin, the company made losses. According to its vision, the company intends to strongly cut fixed costs. During the writing of this article, these actions are already ongoing. This, together with moderate growth of turnover and gross margin, will improve the operating margin of the company to over 1 M€ already by 2018. The net result of the company has been strongly negative in 2014 – 2017. When the visioned turnaround is realised, the net result of the company (and at the same time its operative cash flow) will become strongly positive already by 2018.
Looking at the balance sheet of the company, it can be noticed that after the losses of 2014, the equity ratio of the company is still 37.8%. This can be considered a good level, and after the losses of the financial period it indicates that the company has been historically profitable. However according to the forecast, the deep string of losses in 2014 – 2017 will decrease the equity ratio of the company to 13.8% in 2017. An equity ratio of less than 15% can be considered weak. Therefore, the company is in a situation where quick and drastic actions are required, and these have indeed already started in the company. According to the plan, the company’s equity ratio will increase to 36.5% already in 2018, partly due to the 600 K€ capital investment of the shareholders, and partly due to positive net result.
The company’s inventory is too large (inventory turnover time is over 80 days, i.e. over 4 months) and a large portion of the company’s cash is committed there. The inventory of the company will be heavily reduced, at the same time increasing the inventory turnover time to an optimal level, which in this company is ca. 35 days, by the end of the 2020 financial period. The company has patched it cash position by taking new bank loans, which according to the forecast will amount to 2.55 M€ total by the end of 2017. At the same time, the average accounts payable turnover is ca. 75 days, which means that the company has overdue accounts payable worth ca. 1.5 M€. Liquidity challenges with suppliers have shifted the management’s (and especially the financial management’s) focus towards managing the current cash position crisis and away from actual development of the business. Simultaneously, the terms of purchase for the company have been worse than normal, which has led to a smaller gross margin: in 2014, gross margin was 32.0% and in the financial statements of 2016 the gross margin was 29.8%.
The example shows that a numerical vision can indicate the historical and current elements of the business that require corrective actions. The future vision describes the necessary changes and their timeframes.
The above elements were combined into an operational programme that is roughly as follows:
In the operational programme, normalization of gross margin refers to the intention of the company to return gross margin close to the historical level. According to the plan, this is implemented when the company can normalize its liquidity and thus receive better terms of purchase and lower prices. This will lead to increased competitiveness and a better gross margin.
The actual, detailed operational programme includes short-term goals, responsible persons and schedules. The implementation of the programme is monitored with regular interim reports.
A numerical vision is an important tool for management. It enables easy communication of the story of the company: history, present and future. It presents at a glance the trend of the business, changes and future goals. A new vision means a change in the operation of the company. Revise Oy specializes in change. Contact us so we can help you to clarify your vision.