What is the Crystal Ball and How to use it

RealTime CEO is driven by the concept of “SON Communication” (Strategic Operational Numeric). The Crystal Ball is a tool to assess the numeric part of this process. This should always occur after the strategic issues have been considered.

The Crystal Ball is a decision validation tool and allows you to model the impact of future change.

Before entering any predictions into the Crystal Ball, determine and write down which of the 8 RealTime CEO levers will be impacted by the decision, and what the impact might be. We recognise that the future is uncertain and that prediction is not a perfect science. Instead, we suggest you assess likely ranges of change and then use the tool to assess if that possible change will make the business stronger or weaker.

The 8 levers are represented as the following possible modeling scenarios:

Lever	Description	Modeled in	Question
Price	Price per unit	Percentages	Are you considering a price change?
Volume	Number of units	Percentages	Will you sell more or less units?
Direct Costs – Wages	Wage costs directly associated with the sale of units	Hundreds of thousands	Will direct wage costs change based on the decision?
Direct Costs – Other	Material and non-wage costs directly associated with the sale of units	Hundreds of thousands	Will other direct costs change based on the decision? How will costs behave if the business changes size? Note that for the Direct Costs Other and Indirect Costs Other levers, the increase will exclude depreciation because a volume increase will not increase depreciation.
Indirect Costs – Wages	Wage costs not directly associated with the sale of units	Hundreds of thousands	Will Indirect Wages change based on the decision?
Indirect Costs – Other	Costs not directly associated with the sale of units	Hundreds of thousands	Will other Indirect costs change based on the decision?
AR Days	How quickly is revenue collected	Days	Will collections be faster, slower or the same based on the decision?
Inventory Days	How much inventory is currently held	Days	Will the inventory holding increase, decrease or stay the same based on the decision?
AP Days	How quickly Suppliers are paid	Days	Will payables be faster, slower or the same based on the decision?
Fixed Assets	How much fixed asset investment is held	Hundreds of thousands	Will we need to buy more fixed assets because of the decision?

Having determined the levers that will be impacted by the decision and the range of impact, these are entered into the appropriate section of the Crystal Ball and it assesses the decision using 2 questions:

Should we do this? Can we do this?

“Should We” is determined by the movement in Return as a result of the possible change.

An improvement in return suggests we should proceed.
A reduction in return suggests one of 2 things:
- We should not proceed, or
- If the benefit is a longer-term strategic improvement, we should recognise that there is a short-term cost to the decision. We refer to these decisions as “J Curve” decisions and they have to be managed accordingly.

“Can We” is determined by the movement in Operational Cashflow as a result of the possible change.

An improvement in operational cash flow suggests we should proceed.
A reduction in operational cash flow suggests one of 2 things:
- We should not proceed, or
- If we believe the decision has a strong return benefit, (see above), we need to assess whether we can fund the cash requirement to proceed. This will either come from reserves or possible additional debt or equity contributions.

The Crystal Ball ties the “Should We” “Can We” questions to the 2 RealTime CEO primary measures of:

Return on Operations (ROO%) – this tells you whether the decision increases or decreases the value of your business, and by how much.
Operational Cash Flow (OCF) – this tells you how the decision impacts your cash flow, determining whether you can afford to make the decision without jeopardizing your future.

The Crystal Ball also calculates the impact on the 4 secondary RealTime CEO measures:

Profitability – the percentage of revenue that is profit
Leverage – how many dollars of revenue are generated for each dollar of operational investment
Salary Multiple – how many dollars of revenue are produced for each dollar of salary and wages
Raw Material Multiple – how many dollars of revenue are produced for each dollar of Raw Materials

Changes to the measure are “traffic lighted”:

Green – If there is a 5% (or more) improvement
Red – If there is a 5% (or more) decline
Orange – Between the above parameters

Decisions can be modeled on either Historical (actual) data or Forecast data.

The changes entered do not change the underlying data, so you can input as many different scenarios as desired – just click Reset to start again.

What is the Crystal Ball and How to use it

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