Seth Godin recently wrote “When data and decisions collide”. Over the next posts I will describe a model where decisions and data do not collide.
Organisations make decisions for the business based on reports from various sources. The long term objective of any profit-organisation is the business must be running to profit, otherwise no reason for business to exist other than for passion.
Revenue and costs are the key drivers to this objective. These decisions are made within the operations of the business to ensure the business is running to profit. Marketing strategies, supply and demand decisions and to service customer while running the business to long term strategies.
Most decisions are made reactive. The first question management asks “Why?” Everybody jumps to ensure at the current point in time that the business is not going towards plan. Usually means the sales team has to work harder or we cut costs to deliver the product to the consumer so people may lose their jobs.
This response to data does not take into consideration the reaction the decisions may have an effect on other parts of the business. There is no correlation between the market segments and the different products.
The following model will show that the data will allow the organisation to make concise decisions for the business without affecting other parts of the business. This model will use investor flow value and profitability analysis as inputs to decisions and then the decisions measurable on the profit and loss statement. This model only takes into account what is measurable in the profit and loss statement and does not take into account the outside the business environment intrinsic decisions stakeholders must take when making decisions, though these decisions will be minor with the analysis.
A dashboard is a set of metrics showing a business’s performance at a particular point in time. The model must be able to roll up and drill down to all levels of line of business, market segments and line items on the profit & loss statement.
An operations dashboard is to mitigate risks resulting from decisions in an organisation’s short term strategy for product, delivery and service without affecting the business’s long term strategy and profitability.
An operations dashboard for a matrix organisation is to ensure decision made in one customer segment and/or line of business will not affect the long term strategy of the business within market segment and line of business.
The following set of diagrams will show the theory in creating an Operations Dashboard, drilling down from the business model to the dashboard based on the investor value flow of the business’s decisions and profitability analysis.
The colour index code can be followed as we drill down through each diagram in the model.
Purple – Investor interests
Aqua – Decisions made by the business from investment to customer
Navy Blue – Profit & Loss metrics
Yellow – Decisions and Metrics related to Operations
Light Blue – Decisions and Metrics related to Line of business
Orange – Decisions and Metrics related to Market segment
Dark Green – Operating Divisions
Figure 1. Investor value flow from investment to customer to return on investment.
The investor will invest capital in a company based on a long term strategy of the business and their products. The right side triangle is the “decision side”, showing as we build the product to the customer the business makes decisions on the end product. As the decisions are made the money from the capital investment which is now an operating expense is reduced as each step of the product is delivered to the customer.
The left side triangle shows profitability analysis using the profit and loss statement. The business generates revenue from the customer. Decisions for product, delivery and service made from the right triangle have costs associated with profitability including depreciation and amortisation on capital.
The business will make decisions on their capital investment based on long and short term strategies related on the customer and line of business which has an affect on profitability which in turn affects ROI for investor.
Figure 2. Investor value flow based on the individual components of business operations for a matrix organisation.
The ROI is based on the flow of decisions made by the business on individual components within business operations.
Decisions on capital expenditure, product costs are made by line of business. Decisions on delivery and service to customer are made by market segment. But these decisions are not independent of each other. Long term strategy and mitigating short term risks are interrelated to the market segment and the line of business.
Figure 3. Profitabilty analysis based on long term strategies by line of business.
The profit & loss metrics are based on the market segment and line of business. Figure 3, line of business dashboard, shows investor value flow to net profit based on capital expenditure. This is an indicator of long term strategies. Showing total operating profit based on mitigating short term risks and total profitability for the reporting period.
To seperate data and decision the business must also be able to seperate the cost by line of business to deliver the goods & services and the revenue stream by market segment.
The metric used to measure operating performance is EBITDA as the depreciation and amortisation deals with the initial capital expenditure based on the line of business. The driver of EBITDA is revenue, revenue is generated by market segment.
Figure 4. Operations Dashboard by Market Segment.
The operation dashboard is an indicator of short term strategies are in line with the business’s long term strategy and will give a clear indicator of operating costs by market segment. Metrics are a combination of market segment and line of business.
Figure 5. Level 2 Operations dashboard by Market by Line of business.
The business is now able to separate decision and the metric by market segment, by line of business and by operating division.
The dashboard will allow each solid block in Figure 5 to be drilled down further into individual line items of the P&L of market segment and of line of business.
The dashboard will also allow the metrics to be roll up to Figure 3, by Line of business. Figure 6 shows the P&L to net profit. The operations is the consolidation of Figure 5.
Figure 6. Profitability analysis based on long term strategies by Market segment and Line of business
The operations dashboard will analyse decisions made by market segment and line of business to mitigate short term risks in the operating divisions using profitability analysis. The dashboard will be able to identify all items related to the goods & services provided to the customer and analyse of the mix of market segment and line of business.
The further analysis below will add further depth into the dashboard to be a management reporting system.
1. Cost analysis
- Cost allocation
- Shared and dedicated cost
- Incremental and fixed costs
- Capacity Costing
- Cost recovery of capital expenditure
2. Key performance indicator analysis
- Revenue units
- Costs units
3. Budget, Target and Forecast analysis
- 5, 10 year plans
- Annual budgets
- Quarterly, monthly, weekly
4. Historical analysis
- Business Plan
- Year to Year
- Quarter to Quarter
5. Strategic analysis
- Long term
- Short term
- OPEX vs CAPEX
6. *** Management reporting system ***
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