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Category : money guide

To assess the gap between where the organization wants to be and what it currently can produce, I use the organizational process model shown in Figure 21. This tool helps me view the organization at the macro level and allows me to see at a glance what the organization is accomplishing from a task perspective. It helps indicate whether the work being done is consistent with the organization’s vision and mission.

Moreover, the model identifies any gaps between present processes and future plans. A credit card company I worked with had its genesis in the postwar boom of the 1950s and 1960s, enabling millions of consumers to buy electrical appliances. Although this company had been very successful for decades, competition for market share of appliances increased as the market became saturated. In addition, the spread of other credit resources began to squeeze this company’s profits. Soon the company was expanding into other kinds of businesses including dealer financing, retail space design, inventory financing, and even the financing of capital improvements for dealers. Each area now competed for the resources of the original credit card business, and the company found itself spread too thin. Divisions competed against each other for personnel and budget. And as the top leadership increasingly abandoned initiatives that didn’t produce short-term profits, the whole company’s morale spiraled downward.

However diligently a budget is prepared, things will not turn out as planned. There will be a variance between what was anticipated and what happened. Understanding the differences between actual and planned performance is known as variance analysis. It is useful to analyse such variances in order to understand why things are going better or worse than expected and act on the lessons learned.

The process starts by breaking down substantial variances into their component parts, identifying exactly where and why the variance occurred. For example, small variances in unit costs or unit prices will have substantial effects on the bottom line in a mass volume business. Key performance indicators (kpis) can be used to track and identify variances and areas where the firm’s performance is deviating from expectations.

Common causes of variances include inefficiency, such as poor cost control, poor or flawed planning (for example, relying on historically inaccurate information), poor communication and random factors. Variance analysis is something that every business should undertake but in a practical and pragmatic way that is cost-effective.

Quick (or acid-test) ratio. This is an assessment of a company’s liquidity,  showing how quickly a company’s assets can be turned into cash,  which is why it is known as the quick ratio or simply the acid ratio. The  most common expression of the quick ratio (although there are several  ways of deriving the same result) is to subtract inventory from current  assets, and then divide this by current liabilities. In general, the ratio  should be 1:1 or better, reflecting a healthy proportion of current assets  to current liabilities.

Stock turnover. This indicates how long cash is being tied up in stock.  It is calculated as the stock value divided by the average daily cost of sales. The quicker stock turns over the more efficiently cash is being  used.

Profit vulnerability. The vulnerability of profits to increasing costs can  be monitored by dividing fixed expenditure (for example, fixed overhead  costs such as premises or salaries) by total expenditure. This identifies  where costs are changing and which costs are causing fluctuations  in profitability over time.