Eight Levers That Control the Value of Your Business

Date: 15 June 2017
Category: ROO - Return on Operations
Tags: ROO

If you’re a CEO focused on making an immediate improvement in your performance, which we typically measure by quantifying the amount of value you’re creating in your business (and we call this your ROO%, or Return on Operations percentage), there are eight key actions you can take, or levers that you can “pull,” that will directly affect both your cash flow and your ROO%.

Four of these deal with inputs and the other four deal with outputs.

Inputs

1. Revenue Collection (AR)
2. Inventory Management
3. Supply Chain Management (AP)
4. Fixed Asset Utilization

Outputs 

5. Price Strategy
6. Volume Strategy
7. Direct Cost Control
8. Indirect Cost Control

Shown graphically, they look like this:

The input levers focus on making improvements to balance sheet items while the output levers focus on making improvements to income statement items.

Here are some examples of actions your team can take to increase your ROO%.

Inputs

1. Revenue Collection – Tighten your collection procedures to reduce your overall total AR days by at least 1%.
2. Inventory Management – Implement a lean approach to inventory holdings.
3. Supply Chain Management (AP) – Add extra days to your payables (you know the AP rule – pay as slowly as you can WITHOUT jeopardizing your supply arrangement).
4. Fixed Asset Utilization – Consider additional shifts to better utilize existing assets that may be idle for many hours a day.

Outputs

5. Price Strategy – Increase your prices 1% across the board.
6. Volume Strategy – Introduce a cross-selling campaign to your existing customers by promoting another of your products or services to increase your units sold.
7. Direct Cost Control – Renegotiate your buy agreements with suppliers to reduce your direct costs and maybe even extend payment terms.
8. Indirect Cost Control – Reduce the scope of work of an external vendor (by shifting some work in-house where it’s completed at a lower cost) or ask for vendors to provide a discount in exchange for a longer term.

When we’re working with clients or educating a Vistage or TEC group, we use a sensitivity analysis to show how a 1% change in each of the above can improve cash flow and operating profit and ultimately ROO% and the value in the business.

For some businesses, it’s significant. Actually it’s a game changer!

If you’re a RealTime CEO Software user, you can model this with your real financial data using the Crystal Ball feature. Once you’ve completed the onboarding process, select the Crystal Ball option from the left hand navigation, click on the arrow next to each level and input your potential change.

The resulting change to your ROO% and operational cash flow will display in the top graphs, with your core data displaying below it, allowing you to quantify the value of your actions on the bottom line with 2 questions: “Should We Do It?” and “Can We Do It?”

If your Vistage group has not yet received an invitation to participate, contact me to schedule, or you can set up individual RealTime CEO Cloud Service accounts here.