Cash - De-constructing your Income Statement

Value Trees

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.

Example 1

For the first example, start at Profit = Revenue - Costs.(Income-Expenses)

Working out the components a Value Tree

Element	Components
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.

Example 2

Here we show how we can align all of the business to a single goal. In this instance increase # customers. The normal reaction to this goal might be, "well good luck Sales team". But it's not that simple.

Working out the components a Value Tree

Element	Components
Total Customers->	Existing - Lost + New Customers
New Customers->	Geographic Reach ; Ability to Service; Product Range and Fit; Product Awareness
Is it wise to open a branch in Pretoria when you are losing customers in Vereeniging? Surely you should know why first? Then apply these lessons to your expansion.
Lost Customers->	Price, Service, Quality, Competition, Substitutes
Service->	Attitudes, lack of Training, Poor management, Availability, Capacity
Understanding loss, could be a result of any of these. Make sure you understand why!!

So there is enough to generate thought, but that's never enough to be completely useful! Insight always needs an action plan!

• You will use these value trees later when we complete the Strategy and Execution pieces, this should be obvious....
• It is vital to use these simple tools in conjunction with each other. In these examples, we focused on revenue and customers, but remember to track the scalability of the business, which means keeping an eye on fixed and variable costs!
• These trees remain unfinished, so far you have perhaps a better idea of what your priorities must be, but there after you must assign accountability for the financial revenue line to one of the leadership team, and ownership of the non-financial drivers appropriately too. These then need targets, and they must be tracked.
• Lastly, you can appreciate how a SINGLE strategic goal for your business, can involve everyone. So make sure you do fewer things excellently, instead of many things poorly.