CEO JOURNAL
More Thinking Like a P&L Statement W
DAN MARCUS, TDC CONSULTING INC., AMHERST, WISCONSIN
hen my oldest daughter was young, she came to me one day frantic because she
had lost a favorite toy. She led me to her room, swept her hand across the wreckage, and proclaimed, “See, it’s not here. It’s lost!” Almost before the words were out of her mouth, I made my way to the middle of the room and picked up the “lost” toy. It was there all the time, right in front of her, but she had so convinced herself that it was missing that she literally couldn’t see it. We’ve all had similar experiences in our personal and professional lives, and as a turnaround consultant I see it all the time. I see CEOs, management teams and owners frantic because their businesses seem to have lost the ability to make a profit. I see them overwhelmed by the wreckage of a business that is out of control, and re- acting in ways which, more often than not, only make their problems worse. I find them pouring over financial state- ments, looking for something they desperately want but just can’t see, even though, like my daughter’s toy, it’s right there in front of them. What these CEOs are not seeing is
the root cause of poor profitability— an unfavorable relationship between P&L revenues and P&L costs. In other words, their businesses aren’t making a profit because the revenue they are taking in costs too much. Obvious, right? Apparently not, and for all of the reasons set out in the previous installmant of CEO Journal. CEOs that want their businesses to
earn superior profit need to put margin at the forefront of their thinking. And not “job margin” or “account margin”— which are rooted in the accounting department’s unreal and assumption- laden system of standard costs—but P&L margin, which is more commonly referred to as profit. To get there, CEOs need to think like a P&L statement and apply that mindset every day to aggres- sively manage both P&L revenues and costs with the focused intent of making their businesses more margin intensive. Developing that mindset and creating
38 | MODERN CASTING June 2011
a more margin intensive metalcasting business begins with a fundamental rethinking of finance, manufacturing and marketing priorities. An extremely simple view of finan-
cial priorities is best: Don’t spend more than you take in each month. In P&L terms, this means that CEOs must
ment system that can actually em- power them to control their company’s financial destiny by positively impact- ing the way the business operates and the financial results it achieves. A proper performance manage-
ment system operates separately but alongside the accounting process and
CEOs who want to earn superior profit must make their businesses more margin intensive .
make sure their companies’ net sales line is sufficiently greater than the mainly variable cost of goods sold line that it can also more than cover selling, general and administrative expenses and other costs, which are mainly fixed. Tinking like a P&L statement also requires us to understand that metalcasting is not a high fixed cost business. In fact, fixed costs for most metalcasters are in the 10 to 20% range, while those for true high fixed cost businesses are in the 50 to 80% range. From the P&L standpoint, this means that metalcasting profit- ability is not highly sensitive to changes in volume, as it is for true high fixed cost businesses like airlines, railroads and mining companies. All that said, it is clear that metalcasters must not be managed as if they were high fixed cost businesses, as if volume “to absorb fixed costs” was all-important.
Tinking like a P&L statement also means appreciating that account- ing, and the financial statements accountants prepare, are by design not management tools but reporting tools. Accounting-driven financial statements are supremely important as indicators of success (or lack thereof ), but their utility mainly ends there. Moreover, finance-driven budgets and their attendant variance analyses are, at best, extremely weak management tools and, at worst, counterproduc- tive time wasters. Instead of relying on these ineffectual tools, CEOs need to think like a P&L statement and develop a robust performance manage-
financial system. Rather than reporting or budgeting, its focus is on predict- ing and proactively controlling each month’s performance. Such a system operates in real time so that changed circumstances can be identified and adjustments made before the month is over. It relies on month-at-a-time forecasting, target setting and manage- ment control. It gets everyone on the management team involved and makes better informed managers of them all. It deals in tangible dollars and cents rather than mind-numbing standards, variances and amounts over- or under- absorbed. For all these reasons and more, the best performance manage- ment systems are easy to use, easy to understand and, above all, highly effective at enabling CEOs to do their jobs, bring business performance under control and drive process improvement. A changed view of financial man-
agement priorities and a performance management system are essential for CEOs to think like a P&L statement and prevent their companies from spending more than they take in each month. Fundamentally altering the relationship between P&L revenues and costs is the next requirement for creating a highly profitable metalcasting business. Tis realignment is accomplished by rethinking the way manufacturing and marketing operate and is taken up in the next edition of CEO Journal.
Keep the conversation going. Reach the author at td-
cmetal@wi-net.com to comment on this or any CEO Journal column or to suggest topics for future columns.
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