Converting Your Financial Statements into a Treasure Map!

Introduction

This paper is about a compelling story leading to the discovery and retrieval of buried treasure.  The fascinating thing is that this treasure is buried within your own company.  It lies there in the form of hidden costs, wasted cash and seemingly attractive revenues bolstered with high levels of working capital.  This treasure is not being mined for two reasons.  First, it is invisible to most people and by default no-one is working on it.  Secondly, the few that have an inkling it exists can’t rally the rest of their organization to go after it in a concerted way.

All companies, private and public, have to prepare a set of financial statements.  These statements are complicated and were never designed to be a communication tool.  You may be surprised to learn that few executives outside of the Chief Financial Officer truly understand them.  In fact, we asked a group of billionaires attending a conference at MIT to calculate the cash flow statement from the other two elements of the financial statements (the income statement and the balance sheet).  Only 1 of 30 got it right!

This paper will allow you to interpret the financial story in 5 readily mastered chapters.  Armed with this understanding you will be able to interpret the fundamentals of your own or any other business as well as the Oracle of Omaha, Warren Buffet.

As an executive or employee you will be able to use your financial statements as a means to enroll your entire organization in achieving higher levels of performance.  Instead of the numbers being a story you spin, they become the story in which everyone participates.

We will then turn our attention to converting the financial statements into a One Page Scorecard.  Literally, they will be transformed from a mostly indecipherable set of numbers into a compelling and easy to read treasure map.  This map will identify areas where your business is losing or wasting money and divert it to areas where you can maximize the best financial returns.

Together the map and the story engage the entire organization linking your strategy through to improved operational and financial performance.  The financials are no longer a set of lagging indicators.  They become a powerful interactive communication vehicle linked to core competencies within your enterprise.  The net result is your employees know what actions to take on a daily basis to deliver the maximum potential.

The Power of Story

For many millennia human beings have conveyed complex ideas through the power of stories told around the campfire. 

A belief is not an idea that you possess;

It is an idea that possesses you.

A great idea compels you and others to take action.  Consider the following quote by E M Forster:

Fact:  The Queen died.  The King died.

Story: The Queen died.  The King died of a broken heart.

There is much more drama and emotion in the same facts when woven into a story.  When you can link your ideas into a powerful story you can move hearts, minds and even organizations. 

As Alan Kay HP Exec and founder of Xerox Parc once said:

“Scratch the surface in a typical boardroom and we’re all just cavemen with briefcases, hungry for a wise person to tell us stories”

 

All companies need to file their financial statements.  They are the ultimate arbiter of performance.  They represent all decisions and activities over the prior reporting period.  Companies invent all kinds of additional scorecards such as the Balanced Scorecard mainly because the financial statements are too difficult to read!

Here we show how the statements can be converted into a story that creates an emotional experience that will ultimately galvanize a greater number of your employees to make better decisions that improve long term financial performance.

Meet the Characters – Revenue is Vanity, Profit is Sanity & Cash is King!

Every good story has characters the audience can identify with.  The financial story usually has three, Vanity, Sanity and King.  Take a moment to consider our three characters and think about which one is in control at your company

The first of our trio is an ebullient fellow.  Full of confidence and bluster, the eternal optimist, known as Vanity.  He represents the sales revenues of the company.  He believes that if he is given the right resources and enough authority he can win any deal, dominate any market and double the sales of the company.  In fact he often believes the company doesn’t really understand his importance and if the company were just to get out of his way he could take the company to great heights.  His answer to any financial difficulties is to invest in him and his team and they will sell their way out of it.

The second member is Sanity.  He is all about the bottom line.  For him the ultimate goal is the best profitability for the company.  No nonsense for him, he sees the world in black and white and hates being in the red.

The third member has the grandest title, that of King.  He doesn’t rule the empire but he is very protective of the empires cash.  He hates paying out cash and will lovingly count and hoard any cash he receives.  You will need to have a very persuasive argument if you want him to fund any of your pet projects!

The Oracle of Omaha, Warren Buffet has paid special attention to these characters:

“One of the things you will find – which is interesting and people don’t think of it enough – with most businesses and with most individuals, is life tends to snap you at the weakest link.  The two biggest weak links in my experience: I’ve seen more people fail because of liquor and leverage – leverage being borrowed money”.

Jack Welch has the following advice:

“Number 1, Cash is king.  Number 2, Communicate.  Number 3, Buy or bury the competition.”

We assert that all three characters need to play a balanced role in order to generate enough wealth to have the ability to buy or bury your competitors.

Our fundamental conviction is cash matters. 

Companies exist to create value for their owners.  This enables them to attract additional investment in their company (equity capital) to fund its growth.  Without this investment companies ultimately stagnate or perish to more aggressive competitors.

Investors invest with cash and expect superior cash returns.  Most companies place too much reliance on performance using the singular lens of profitability.  They are infatuated with growth at all costs.  As we shall see revenue growth quality can determine whether cash is consumed or released.

Successful companies manage both the income statement and the balance sheet.  They have learned how to effectively make money by using other people’s money (return on Capital Employed).

The 5 Chapters of Your Financial Story

You can communicate the story of your business in 5 easy to digest chapters:

1. Growth Quality
• Did the sales achieved by Vanity create superior financial performance? If Vanity was given more cash by the King could we have achieved higher growth?
2. Profitability Performance
• Does Sanity believe Vanity’s deals represent good growth?  Did they enhance or erode margin?  Did they help strengthen our brand in the market or does Sanity think we discounted unnecessarily in order to win the business?
3. Working Capital & Fixed Capital Utilization
• Did we have to fund Vanity’s success with additional working capital-did we need to hold higher inventories for example in order to guarantee timely deliveries; did we need to build an extra production line or put on a weekend shift to meet these needs?
4. Cash flow management
• The King not only counts the cash at the end of the year, he needs to make sure the business has enough to pay monthly salaries, your suppliers, the bank and others lending you money.  Is your cashflow sustainable and is it predictable so that the King will not be surprised and have to run to the bank to borrow at an unnecessarily high interest rate.
5. Return on Investment
• The ultimate question which Vanity, Sanity and King are held accountable for.  Did they make money from other people’s money?  The company either borrowed money from their shareholders (this is known as equity) or banks (this is known as debt).  If we borrow at say a 6% rate of interest and we make 5% return—not good!  If we made a 18% return it means for every dollar we borrowed we got three in return—sweet!

It is important to understand that these are story elements and influence each other.  It is sometimes hard to fathom how the income statement and the balance sheet interact with the statement of cash flows.

In our story it is easier to understand that Chapter 2, Profitability, and our character Sanity, is influenced by the quality of the work undertaken by Vanity in Chapter 1.  The combination of the first two chapters manifests in the working capital aspects of Chapter 3.  The activities of both Vanity and Sanity plus the working capital needs determine whether the King is happy with his cash in Chapter 4.  The last Chapter looks at the combined efforts of our three principals and tells us not only are we making money from other peoples money, but how much risk are we taking on in doing so.  For example, if we are borrowing at an average cost of debt of 6% and we make 18% return we can see that this is a lower risk than borrowing at 6% and only getting say 10% in return.

Warren Buffett looks at this risk in this way:

“There is a huge difference between the business that grows and requires lots of capital and the business that grows and doesn’t require capital.”

Creating the Treasure Map and the Compass

In the following illustration we have taken the standard financial statements of a company with revenues of $3.7billion and depicted them on the left hand side.  On the right hand side we have recast the same numbers but within our story context and the 5 chapters.  This acts as a compass giving us directions in which to sail to discover more about our opportunities.  As we look at the chapters the story emerges and reveals areas of opportunity, the hidden treasure locked in the business.

Few people can take the left hand side and draw meaningful insight.  However, the right hand side tells a story and gives us clues we can explore.  We easily see that Vanity has been very busy.  He had a revenue growth challenge of 15% and has handily come in over budget.

Sanity is feeling a little mystified.  Vanity has been celebrating in the board room and all of his sales team has gone for a week to the beach in Cabo St Lucas for meeting their 100% sales club target.

Sanity is concerned that profitability (expressed as EBIT or Earnings Before Interest and Tax) as a percentage is less than the year before.  Consider, if we had just got the overall profit number from the income statement of $450 million, which was better than the $400million the previous year, Vanity’s celebrations would have not been in question.

The King is beside himself with worry.  He’s scratching his head wondering how the net cash flow is a negative $270million!  He wasn’t expecting that, hadn’t planned for it and is not altogether clear how it happened.  So we grew by 23.3% and cash is leaving the business???

The compass has given us pointers—let’s go on a treasure hunt!!

Chapter 1:  The Growth Quality Story

Revenue growth or depletion has a story quality in of itself.  It can be anything from a greek tragedy through the Heroes Journey where all manner of obstacles and dragons have been slayed for Vanity to ultimately make the numbers. 

Revenues can be grown in three ways:

• by increasing the number of sales made
• receiving higher prices for those products and services that have been sold
• by acquiring new companies or products/services

We will ignore acquisitions in this treatment.  We see from Chapter 2 that Sanity is bothered by the fact that profitability has not grown in line with this revenue increase.  Good financial discipline would say that superior revenue growth happens when profit growth is in excess of revenue growth.  So we would expect in a great company that profitability should be up 23% or more versus the 12% we see.  This gives us a clue to look at what may be happening to our costs or to our market pricing.

 

Chapter 2: Profitability Story

There are two factors that influence the profitability.

The equation is simple: revenues – cost of goods sold (COGS) = profit.

Margin is a way of expressing profit as a %. In this example we have seen margins erode from 13.33% last year to 12.16% this year.  This gives us two nuances to our profit story.

Margin destruction occurs in only two ways

1.  We reduced our prices (either intentionally to win more business or through response to competition)

2.  Input prices (COGS) increased by a proportion greater than our ability to pass these on via price increases to our customers.

Chapter 3: Working Capital Story

The third chapter in our story concerns the balance sheet.  This represents the financial condition of the business.  This means among other things, keeping assets and liabilities in proportion to sales revenues (Vanity’s domain) and the expenses of the business (Sanity’s concern).  It also ensures we manage the King’s cash.

The working capital story examines how much money the business uses to support every revenue dollar we make.  In this case, for every dollar of revenue that Vanity sells, we consume nearly 21 cents just keeping the business operating.

Working capital has 3 elements:

• Accounts Receivable (money we expect to receive from our customers for service or products rendered)
• Accounts Payable (what we have to pay our suppliers)
• Inventory (the goods and services we have in house which we need to provide product and service to our customers in a timely and competitive fashion)

There is a startling story in this example as we see working capital has increased from 14 cents for every hard earned dollar of revenue to nearly 21 cents.  This difference is the King’s lament as it has to be funded by our cash flow (and in part a key reason why the business is consuming cash).

Chapter 4: Cash Flow Story

The King is out for blood as nearly $271 million of cash is leaving the business.  The company is profitable and growing but we are not managing that growth in a way that optimizes our cash needs. 

Let’s talk about the areas of dysfunction….Andre I need more on this section

Chapter 5: Return on Investment Story

This chapter is the summation of the preceding four and answers two fundamental questions:

1. Does our business make money from other people’s money?
2. Are the risks we take well founded?

Companies exist to create value for their owners.  They can be funded in only two ways:

1. Debt.  Which we may borrow from a bank or other financial lender
2. Equity.  This is the money the shareholders or owners have in the business

They are looking to drive a superior return from these investments.  This can be represented as Return on Capital Employed.

In this case ROCE is 25%.  In simplistic terms if we can borrow money at approximately 7-8% interest we can convert it to a return of 25% or in other words, for every dollar we borrow to grow our business we generate $3 in return.

However, our story has a richer contest.  We see ROCE has fallen from 31% to 25%.

The equation for ROCE is:

ROCE = EBIT/ Net Operating Assets

We can express it in a different way:

ROCE%=$EBIT/$NOA

So we see that ROCE shows how income statement performance and balance sheet performance combine together.

To make the story quite simple, ROCE = EBIT/NOA.  Therefore we need to do more EBIT using less Operating Assets!

The Basic Story

Our visual scorecard has created a simple story that will intrigue the organization:

There is an organizational dysfunction between Vanity and Sanity.  Yes we have grown by 23% but profitability has been eroded.

We are running our business less efficiently than we have in the past.  For every hard earned dollar of sales revenue we are consuming 21 cents of it within our operation.

The combination or our eroding margins and our working capital inefficiency means whilst we are a profitable enterprise we are consuming vast amounts of cash which is upsetting his Lordship the King and is causing angst amongst our shareholders.

We know the risk profile of our business is sound and we can attract additional investments to grow but we have to investigate why our efforts are not generating an even higher return on investment.

This is a better message to engage the organization than the one they may derive form the complexity of the financial statements which might be perceived as sales went up 23% and profit is up to $1.4 million.  Let’s continue doing more of the same.

Finding the Treasure Chest and Counting the Booty!

Armed with the story elements we can examine our Visual Scorecard to determine the treasure that is hidden and can be realized by some simple strategies.  We call this treasure “Gross Potential”.

Let’s look at the key elements

First, we can look at how sensitive our performance is to price variation.  If we click on revenue growth we see options to vary revenue growth and price.  Vanity insists that if he had the right resources he could have made a 30% sales growth.  If we punch this in and look at the net impact we see for an additional 7% sales increase or about $200,000 in value:

·         EBIT rises less than 1%

·         We consume $6.6million more cash

·         ROCE improves by 2%

This does not impress the King.

If we reduce sales from 23% to 15% and raised prices by 6% we see that total revenues are about the same but look at what it does for the other elements of the financial story:

• EBIT rises more than 3%
• Working capital is reduced
• Cash flow is $105million better!
• ROCE is up 2% (rather than down 6%)

So Vanity has to focus more on holding price rathe than giving business away and Sanity is happy and the King has a better cash position whilst we have a better financial risk and return in our business.

Let’s look at Chapter 2.  We see our COGS has risen in percentage terms.  If we just hold COGS at the same level we did the previous period (representing just a 3.83% reduction):

• $115 million in cash is generated
• ROCE is up 8%

Chapter 3 is always a fruitful avenue

We see receivables days have increased form 46 to 55.  We have already demonstrated we have the organizational behaviour to operate at 46 days.  If we reduce receivables to this level the net change values are:

• We get $930 million more cash in our bank
• ROCE increases over a percentage point.

We also see our inventory has shot up from 88 to 122 days.  There may be good reasons for this such as we are supporting a new customer segment and we wanted to make sure we had stocks on hand.  But did we truly understand the consequence of this decision. It may have helped Vanity grow sales but at what cost.  Well, by changing the inventory days back to the preceding period levels we see that this decision costs us:

• Nearly $222million in cash requirements
• 3.4% erosion in ROCE

In many cases we don’t even consider inventory and its balance sheet implications  in our calculations and so we don’t fully appreciate the impact it has on the King’s cash and the risk it burdens our business with.

Now in Chapter 4 let’s look at The king’s empire and see if we can’t make sense of why net income is up $260 million yet we consume $270 million in cash. 

If we look at the cash flow statement we see …..

So let’s apply these areas of improvement to see the picture of Gross Potential and The Treasure Map

We applied the following impacts:

1. Reducing sales for 23% to 15% but having a price protection strategy of 6% points
2. A small reduction of 3% in COGS equivalent to last years demonstrated practice
3. Managing Accounts Receivable with the same rigor we did last year (down to 46 days)
4. Focusing on our inventory holdings and reducing back to last years levels of 88 days

Value of the Booty:

• Revenues are about the same
• Profitability is up 7%
• Every revenue dollar only consumes 8 cents less in working capital
• Cashflow is up $500 million
• ROCE has shot up to 47%

Now you can develop the right strategies and management systems to reinforce the behaviours that enhance financial discipline and collect the treasure in your business.  Day to day decision making is forever changed as your employees are armed with better information and are acting in a way that directly impacts the ultimate arbiter of performance, the financial statements!

10 Business Performance Laws

#10    It’s about Growth QUALITY. Not growth. Use Return on Capital Employed (ROCE) as your measure not just profit. 

It’s a little more complicated but in essence. Growth management is the delicate balance between infrastructure investment and time to return especially the investment in you intangible assets

 #9     Know the difference between good and bad DEBT.

Some call it the leverage factor. Debt can be real cheap or real expensive. You need to understand how to know the difference.

 #8     Know your company’s MAGIC NUMBERS, it’s vital signs –

Your 1-page scorecard gives you’re an immediate look at your current and future scenarios!

 #7     SEGMENT – know where you are making money and cash.

Profit or cost centers must show both income statement and balance sheet performance. NOT ONLY INCOME STATEMENT RESULTS.

 #6     BREAK IT before it’s broken!

What has previously made you successful will not always be the winning formula for the future.

 #5     Surround yourself with PEOPLE better than you.

The great AH Ha is when you hear your people say “I did it”

#4      COMMUNICATE the vision.

Have a clearly defined goal and implement like hell!

 #3     Be a LEARNING ORGANIZATION.

LEARN from learning.

 #2     Make GOOD DECISIONS.

Better still, make the decision.

#1      FOCUS on focusing.

Its not 200 things its most probably 1 to 3 things know what they are and know how to focus on them.

Lagging indicators –Using Financial Statements to unearth dysfunction

Unfortunately financial statements being a record of the past may or may not represent the future. As such we refer to financials and their related interpretation measures as lagging indicators.

On the other hand we can create a set of financial statements that represents a future that we wish to perform to. Some call it a budget.

The failure with “the budget” is not in the final product but more in the preparation process. Budgets are usually not the most favorite pastime for those who are involved in the preparation. Normally it takes a lot of work WITH VERY LITTLE FEEDABCK except for the not acceptable stuff people get from senior management.

More critical are the situations where senior management believes that their design of the budget process is highly participatory and they have as many people involved in the process as possible. Only in very few instances do people actually participate (apart from doing what they have to do) normally there is nothing in it for them except more work. Management even solicits proposals but they go nowhere and at the end of the day it becomes a spread sheet nightmare with a whole lot of number crunching and very little thinking

Once again we will be controversial. The budget is very important but the effort is not in the numbers it is in the thinking. Preparing the numbers should be about 5% of the total effort. In fact we will prove that a summarized income statement, balance sheet and cash statements at the very macro level are as effective if not more effective as the mass detailed line by line outputs.

We bet a $1 that when a detailed budget is reviewed against actual and there is a reasonable variation between the budget amount and the actual amount that the standard reaction is

      The budget was wrong

      We accounted for that in another area or it does not matter as that category is intact.

      It’s a timing difference (the amount will correct itself in the future)

      There is a good reason for this difference we had no real other choice alternatives

      And so on

 Next time please observe how these detailed line items are managed if we are wrong the $1 is yours.

Our philosophy is based on getting the foundation in place. The base of this foundation is the knowledge of the fundamentals.

Fundamental	Change agent
1. Where did we do well	What decisions combined with good execution produced the expected result.
2. Where we did well, can we do more of it	How sustainable and replicateable are the superior performance activities. Can we convert their activities in core competencies?
3. Where is the opportunity	As defined by our gross potential
4. Where  are we sub par	Is it worth while investing to change

These fundamentals become the basis for our lagging indicators. These lagging indicators in turn become the driver to our leading indicators or core competencies

Let’s use our financials to assist in defining these fundamentals

Figure 8 some examples that are revealed by the financial statements that have a direct connection to the way we do business

A greater understanding of these dysfunctions will be gained in the next part 3 of our blog – The 5 chapters of financial statement communication.

Remember a dysfunction can also be a superior value added function if this is the case it would fit under fundamental 1 and possibly be part of fundamental 2.

For example fundamental 1 is about where we did well. If EBIT (operational profit growth percentage) growth % was 10% and revenue growth % was 8% we have a dysfunction although be it in the right direction. I realize this sounds crazy but it is quiet often under this circumstance that I ask the question “what did you do to get this result or outcome”. What would you suspect the 6/10 answers are!

“We not exactly sure… we increased prices on certain services, we focused on some defined segments and we made some dramatic people changes but at the same time input costs increased and we also had to drop our pants to keep 2 key customers”

Great so what’s in there is a core competency that we can replicate and what was due to a couple of stars that happen to be in alignment at the time.

 The moral is that we often look over the signals that could give us superior performance.  It’s amazing how our numbers can give us these signals all we have to do is know what we did that created the result and then replicated like crazy.

We are now ready to start the budgeting process. Our budgets are prepared on a macro level at least at the first run stage. The budget will be driven by the 4 fundamentals. For those environments where only fundamental 1 applies we will be most conservative with our projections. Where fundamental 1 and 2 applies we will be very aggressive with big performance improvements expected. Fundamental 3 is the tricky one as the ability to extract large amounts of value here requires a lot of good thinking, the right decisions, good execution and an excellent feedback system. In other words the management focus here must be pristine.

Create the budget clearly showing which fundamentals are implanted where. Prepare the income statement balance sheet and cash flow statement at the minimum of 4 90 day or quarterly cycles.

Now comes the fun part connecting these lagging indicators to the leading indicators or core competencies. Before we do so let’s make sure we have a foundation in what these leading indicators are and how important it is to identify and describe them appropriately

Global Financial Bridge is a great tool to identify these areas of dysfunction simply by looking at about 30 numbers in your One page scorecard.

Business Case Sales People

What customers want

The recent economic conditions may have changed the way that business is conducted either permanently or for a very long time. What worked before may very well work against you today.

Yes, the customer wants a solution; that is a competitive necessity. What they really want is clarity.

How does this solution impact my financial performance?

And

The more substantive evidence you can provide the better.

Here lies the challenge. Financial performance is an integrated discipline, about how a solution will impact the whole.  By the whole we mean the income statement, balance sheet and the cash flow statement.

 Financial statements are the only universally recognized way to measure how and if value has been created or destroyed. Real advantage is created when we connect the solution we are selling with how it impacts the customers financial statements.

This is the Global Financial Bridge Mission … to connect people to their financial statements. The ability to start and end the communication process through the lens of the customer’s financial statements creates a whole new dimension in sales leadership.

Our answer is the ONE PAGE FINACIAL SCORECARD. Why? The total process can be explained with some 30 numbers in an interactive real time way.  AND it is….

$   Informative

$   Fun

$   And Engaging

 Using Global Financial Bridge motivates non financial people to want to connect to financial statements. This is the secret to ensuring interest and ongoing desire in an area which is difficult to impart into the frontline culture.

Our real value is more apparent in the experience of a real time WEBEX presentation for 30 minutes.  The high impact value offer is delivered visually in an informative, fun and engaging way.  We use technology to deliver a story that negates fear and inspires adoption; real time.

Figure 1 the One Page interactive scorecard numbers in $’000

The power of the one page score card allows people to do what if based on any strategic scenario. Then to measure the impact on the various decisions simply by isolating the financial consequence of the decision through the net change feature. This net change feature shows how the income statements, the balance sheet and cash flow statement are impacted all in a one page environment.

Non financial people are drawn to the scorecard as it is fixed formatted and tells the financial story based on the 5 Chapters.  (See right hand side of scorecard)

Chapter 1 – Growth quality

Chapter 2 – Synchronizing operational profit with changes in growth

Chapter 3 – Working capital 

Chapter 4 – Cash impact and the road to sustainable cash flow

Chapter 5 - Creating value through the return on the invested $ (Return on Net Assets)

The fixed format dramatically enhances the learning curve creating confidence with repetition.

Figure 2 Expanded view numbers in $’000

  We encourage people to grow with their learning progress the expanded view portrays a far more detailed explanation of each of the 5 chapters. These detailed views are introduced as the person expands their learning capability.

What we offer

Our solution is education. We know that people can make a more compelling proposition when they relate to the ultimate scorecard being the customer’s financial statements. Where we provide unique and sustainable advantage is by combining theory with technology to create a real time experience that is engaging and fun.

The pathway to financial statement connection establishes the 4 phases of experiential learning. Each phase creates a more intimate alignment with what is being sold to how this offer could impact the customer’s financial statements.

The freely availability of listed company financial statements takes this learning to a whole new level as the One Page Scorecard can provide a instant diagnostic source where a potential solution may be the most appropriate. 

We take dedicated participants to the phase of the development program that is right for them. We can provide online testing if required in order to assess an individual’s progression path.

In addition the One page scorecard can be placed on each qualified person’s laptop to use and practice on if required. The software can be branded if required to enhance the customer experience.

We train on WEBEX or in traditional classroom environments. Each phase takes between 2 half day sessions to 3 days sessions.

Please contact us

agien@gfbridge.com

How we make decision around our pricing policies can have significant impact on profitability. This table shows the amount of additional sales that are required to counter the potential price reduction. For example if your current gross profit margins are 20% and your pricing policy allows for a 2% discount you have to increase total sales by 11%.

What should also be considered is the working capital impact that the price discount creates. the additional revenue absorbs additional working capital which can only be funded by cash (or more debt). Keep in mind that if you increase your revenue in the above example by 11% you are not  creating more profit so your cash flow is not supported by any income statement improvement.

This table can be a great way to challenge the sales or marketing team.

You can also use Global Financial Bridge One Page Scorecard to identify the total impact on the income statement, balance sheet, cash flow and key management metrics contact Andre Gien at agien@gfbridge.com and we will show you how to revitalize your financial or board meeting for as little as $600.00

Decreasing your Prices

If Your Present Margin Is…..

                        20%    25%    30%    35%    40%    45%    50%    55%    60%

And you discount your price

by:           Your sales must INCREASE by the amount shown below to keep the same margin…

2%                  11%     9%       7%       6%       5%       5%       4%       4%       3%      

4%                  25%     19%     15%     13%     11%     10%     9%       8%       7%

6%                  43%     32%     25%     21%     18%     15%     14%     12%     11%

              

8%                  67%     47%     36%     30%     25%     22%     19%     17%     15%

10%                100%   67%     50%     40%     33%     29%     25%     22%     20%

12%                150%   92%     67%     52%     43%     36%     32%     28%     25%

14%                233%   127%   88%     67%     54%     45%     39%     34%     30%

16%                400%   178%   114%   84%     67%     55%     47%     41%     36%

18%                900%   257%   150%   106%   82%     67%     56%     49%     43%

20%                -           400%   200%   133%   100%   80%     67%     57%     50%

25%                -           -           500%   250%   167%   125%   100%   83%     71%

30%                -           -           -           600%   300%   200%   150%   120%   100%

The table above indicates the increase in your sales that are required to compensate for a price discounting strategy. For example, if your margin is 40% and you reduce your price by 10%, you would need your sales volume to increase by 33% to maintain your profit. Rarely has such a strategy worked in the past and it’s unlikely it will work in the future!