We have seen how easily the contribution curves can quickly provide priorities for the business to focus on. It really shows what must be conserved and protected, and those areas of value destruction that need urgent attention. We use Value Trees to break down the IS and to get a full picture on what levers to pull as we try and assume proper control over the things we should control. Later in the People Section, you will assign accountability and ownership to the Income Statement, and those accountable for a line which is measured in ZAR, will want to assign ownership to the various drivers of the financial line, and clearly show how certain activities can be linked directly to the finances of the business.
We will work through these two examples, and then construct one for your business. As always click on the image to open up a separate window to see the detail.
For the first example, start at Profit = Revenue - Costs.(Income-Expenses)
|Profit Before Tax = Income - Expenses||Expenses are made up of Fixed and Variable costs|
|Expenses->||A separate tree is built for expenses - not shown here|
|Income->||Income has two components Non-Interest Income & Interest Income|
|Interest Income ->||is driven by an indep. treasury, and the market, so ignore.|
|Non-Interest Income->||Transactional Income + Account Income (Fees)|
|Account Income ->||Total number of accounts x ave account fee|
|Total # Accounts ->||Accounts Retained - Accounts Lost + New Accounts|
|Notice here that we can have different things we wish to track, for example we might know that clients that switch from a competitor are more valuable, and wish to track this. Or maybe there was a tactic to win clients just as they leave university|
|New Accounts->||New Industry Client + Switching Clients|
|There could be some concern that your new accounts are not increasing, despite all your recent marketing, so you need to track this. you could assume that marketing worked by the increase in quotes issued, and so the word is out but the quotes are not being converted, why? they took too long, too expensive? only the tree will do this in a manner that is clear to all|
|New Accounts->||Total quotes - total NTU (not taken up)|
|Hopefully you can appreciate now, how we can show every person in the business how they contribute, you can also attach operational metrics to financial outcomes.|
So there is enough to generate thought, but that's never enough to be completely useful! Insight always needs an action plan!