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  • About Us
    • Nick Setchell – RealTime CEO
    • Vistage & TEC WorkshopsNick Setchell has been working with Vistage, the world’s largest CEO organization, since 2001.
    • NewsSee what’s happening with RealTime CEO.
    • Economic Update Report
    • Contact UsReach out to us. If you’re interested in booking Nick to give a keynote address or workshop at your conference, please include the date and location.
  • Concepts
    • Fiscal Focus Financial Statement AnalysisUnlock the hidden numbers in your P&L and balance sheet to see how you’re performing in 11 vital metrics.
    • Should We? / Can We?View, in real time, the actual financial impact of the hundreds of business decisions your team makes every month.
    • 24 Month Rolling ForecastingBlend your trailing twelve months with a rolling 12-month forecast to get a complete financial picture of your business.
    • J Curve ManagementTrack the number of investments you’re undertaking, the 3 phases of each, and the 5 rules for managing them.
    • Return on Operations – ROOView your return on operations percentage — your ROO % — the most powerful number to measure business success.
    • CEO Performance AnalysisBenchmark your performance as a private-company CEO against others in your industry.
  • Resource Center
  • Blog
  • Login
  • SUBSCRIBE

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:

  1. Return on Operations (ROO%) – this tells you whether the decision increases or decreases the value of your business, and by how much.
  2. 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:

  1. Profitability – the percentage of revenue that is profit
  2. Leverage – how many dollars of revenue are generated for each dollar of operational investment
  3. Salary Multiple – how many dollars of revenue are produced for each dollar of salary and wages
  4. 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.



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