29 Apr, 2020
In the earlier tips, we examined some of the ways you can measure, assess and understand the impact of the current crisis on your business. In this tip we consider a way to explore possible responses to a crisis.
Continuing to deliver a business-as-usual strategy in the current crisis probably isn't the right approach, nor is a reactive unmeasured approach. To assist your planning, the Goalseek analysis may be a useful tool for exploring scenarios and the impact of potential tactics.
The Goalseek analysis in Fathom helps you to answer the ‘How do we get there?’ question. For a range of financial metrics, you can identify what changes to drivers are required to achieve your goal. For example, in the screenshot below, the current result for ‘Return on Capital Employed’ is 10.31%, and the set goal is 15%. The analysis then helps to identify ‘What changes are required to achieve this goal?’.
Similarly, you can also use the Goalseek analysis for profitability metrics (like Gross profit, Operating profit and Net profit) and Cash Flow metrics (like Operating, Free and Net Cash Flow). You can adjust the various sliders to see the impact of a change in any of the drivers on your goal. In doing so, it is helpful to consider what levers are realistic to pull, and by how much. For example, a lengthening in Accounts Payable Days may be realistic if you are paying suppliers within current terms of payment. While a reduction in Accounts Receivable days may be difficult to achieve if your customers have been adversely affected by COVID-19.
It is also helpful to consider if adjusting one lever effects another. For example, will an increase in price cause a fall in volume sold (or vice-versa)?
The Goalseek analysis helps to understand the sensitivity of some of the key drivers in the business. A driver with ‘high’ sensitivity indicates that a small change will have a significant contribution towards achieving the goal. Identifying such drivers may reveal some “easy wins” for the business. Conversely a driver with ‘low’ sensitivity indicates that a large change will be required to make a material contribution towards the goal.
In this example, a 3% increase in Price would have an equivalent impact on profitability (EBIT) as an 8.8% reduction in Variable Cost of Sales.
The Goalseek analysis helps to illustrate the value of marginal gains – that multiple small improvements, made to the right drivers, can have a significant overall impact on business performance.
This downloadable guide by Geni Whitehouse highlights some very practical actions which you can consider undertaking to support your planned change to drivers.
A summary of these actions is shown below:
Driver: PriceActions you might take to improve pricing:
- Evaluate your product mix
- Identify the most and the least profitable items
- Explore online sales options
- Create premium offers or service specials
- Suggest ordering a “combo” or bundling related items
Driver : VolumeActions you might take to increase sales volume:
- Implement marketing campaigns
- Offer sales promotions for volume purchases
- Create bundled pricing for related itemsCreate sales contests for staff
- Tighten credit policies for new customers (reduce volume)
Driver: Variable Cost of Goods Sold and Variable ExpensesActions you might take to reduce costs/expenses:
- Negotiate purchase discounts
- Evaluate early payment discounts
- Review sales commissions or compensation policies
- Monitor inventory levels daily
- Identify slow-moving items
- Minimise inventory shortages
- Reduce spoilage/wastage
- Reduce number of returns by identifying reasons for item returns
- Maximise efficiency of warehouse layout
- Examine workflow in manufacturing assembly processes
Driver: Fixed ExpensesActions you might take to reduce costs/expenses:
- Analyse payroll and benefit costs
- Increase accuracy of payroll for hourly employees
- Eliminate payroll tax penalties
- Eliminate other non-essential expenses
- Review costs as a percentage of revenue and look for increasing trends
- Reduce shipping and postage charges
Driver: Receivable DaysActions you might take to reduce AR days:
- Review payment history for individual customers
- Set credit limits assigned to each customer
- Review your credit policies
- Analyse your customer mix
- Consider accepting credit card payments (if not already doing so)Consider
- requiring up-front deposits on select items or services
- Generate electronic invoices for faster payment (if not already doing so)
- Assign an employee to make daily phone calls to accounts over 45 days outstanding
- Consider using collection agencies
Driver: Payable DaysActions you might take to increase AP days:
- Identify if certain vendors can be paid later
- Analyse early payment discounts taken
- Electronically pay vendors on the due date
Driver: Inventory DaysActions you might take to optimise Inventory days:
- Monitor inventory levels daily
- Automate restocking process
- Review Purchase Order processing
- Examine product lead times by vendor
These actions provide some possible tactics which your business can implement in response to business challenges. Additionally, we hope the insights provided by the Goalseek analysis will be helpful for creating plans to navigate your business through the choppy waters of the current economic crisis.
Log in to Fathom and use the Goalseek analysis to see which levers you can pull to give you the best chance of hitting your business goals. Not a Fathom subscriber? We offer a 14 day free trial, no credit card required.
Written by Antoni Gomez
Antoni is an ACA qualified accountant with 6 years of Big 4 experience. As UK Head of Implementation, he now helps firms implement Fathom successfully and trains them to use it.