When considering where to start on a business process project I like to investigate the Cash-to-Cash process. I think of the Cash-to-Cash process as the “Cash Supply Chain” managing the key business resource of money. This is an essential ingredient to the survival of the business and the achievement of its Strategy.

There are many KPI’s (Key Performance Indicators) derived from the Cash-to-Cash process. All focused on managing the “Cash Tank” that fuels the company’s progress through its lifelong business journey. The diagram shows a financial perspective which is essential when dealing with investors and organisations that supports the business through its growth and stability objectives. The diagram illustrates clearly how a business maintains sufficient cash resources to meet their resourcing needs, or risk serious financial consequences.

A key measure on a business is whether it has sufficient cash available to meet its short term responsibilities (short term liabilities). There are a number of key ratios used by investors to gauge the liquidity of a business i.e. Current Ratio, Quick Ratio and Working Capital to Sales which are some of their favourites. However, when considering the internal operations of a business, the focus should be more on Working Capital Days.

 

The illustration shows the funding requirements for a business and highlights the points of measure which can be applied to control this process and reduce the organisation exposure. We are all very conscious of the recent economic events and the impact this has had on business. This very simple diagram illustrates the importance of time gap between cash-out and cash-in and the impact that product quality and effective resource management can have on this process. This can be taken further when investigate the impact of the cash-to-cash process on the supply chain and how this affects the relationships between the business and its customers and suppliers.

The importance of the external factors and how they can impact they have on the business is shown in the above diagram. All businesses should have similar internal measures in place to ensure external relationships with Investors, Customers and Suppliers are well maintained and focused on meeting the goals and objectives of the business. It is ideal if the relationships within the supply chain are transparent from a planning perspective to ensure there are no surprises and that the satisfaction level is of the highest standard.

I have just arrived at my home in Pünderich on the Mosel in Germany. The journey by road from Swieqi, Malta to Pünderich was unplanned and I was totally reliant on my trusty Satellite Navigation system. To locate the ferry ports I broke my journey into three stages from:

1.       Swieqi, Malta to the Valletta ferry departure point

2.       Pozzallo in Sicily to the port of Messina the next ferry departure point to Villa San Giovanni in southern Italy.

3.       Villa San Giovanni I hit the find home key and set out on the rest of the journey, which was over 2100 km travelling the length of Italy and Switzerland to Germany.

I had complete trust in my Satellite Navigation system and did very little preparation for this part of the journey.  This turned out to be a big mistake, in Southern Italy we encountered major road works and changes to their highway system. Around 200 km south of Naples my Satellite Navigation system became extremely confused sending me here, there and everywhere. This went on for about 2 hours before I decided it was time to buy a map. Of course once I had bought the map my Satellite Navigation system decided it now knew the way and managed to work out a way on its own.  This caused major delays to my arrival in Germany and ran up additional costs.

When I calmed down and started think straight once more, I began to see this as a good analogy to business process mapping. If a high-level plan is not first established and broken down into manageable inter-linked stages it is quite conceivable that the processes could become unlinked and lose their way impacting overall performance of the end-to-end process. The same issues arise from changes to processes without established change management procedures in place.

I usually use the high-level business entity diagram, which was discussed in an earlier Blog, to enable me to build a business model that structures the processes around the ‘Core Value Chain”.  It is an excellent framework to use when discussing BPM with Stakeholders as it introduces Objectives, Critical Success Factors, Key Performance Indicators and the concept inter-dependent processes. Overtime I it has provided me with a repository of pre-built generic models by industry which I use to speed up the discussion processes and use as a mechanism for getting quick consensus. In conjunction with this method I also use an application map to establish what is in place and understand the gaps in the processes. Using these simple visual models makes it much easier to discuss the project and start the process of building a repository of project information.

By mapping out the key business areas in this way a portfolio of applications can be established taking into account all external factors as well as the intercompany transactions. Also it gives a quick visual view of the key process areas and their relationships. In fact as a CIO I used this method to establish a portfolio of prioritised projects. For each of the areas in the above application map a more detailed list can be compiled which can be used for annual budgeting purposes. This approach will lead to a future discussion on how BPM and BI play a part in Enterprise Architecture Frameworks such as TOGAF.

When I was working for the Burroughs Corporation in the early 80’s, I came a across a paper on the DuPont Ratio Analysis. I was intrigued by this method of analysing key ratios and started to use it as a sales tool for justifying the investment in large software products. When targeting a company we would use Dunn and Bradstreet to obtain the Industry Sector Key Ratio averages and also collect copies of the annual reports of the prospects and their competitors. Using this information we built a DuPont Ratio Analysis model in a spreadsheet to compare the prospective companies key management ratios with the industry average and their competitors. Using the spreadsheet model we attempted to demonstrate to the prospect how by improving selected key ratios by the use of our software we could improve their competitive position and justify the investment in the software.

This method of Ratio Analysis is very effective when using Business Process Management combined with Business Intelligence to monitor and analyse the performance of an organisation. When considering a key ratio it is important that it is determined from an end-to-end process that it can be de-composed through lower level processes and their corresponding Key Performance Indicators (KPI’s). This provides a mechanism to assign responsibility and analyse the impact of the ratios changes on the overall performance of the organisation.

The Level 1 key ratio that reflects a measure of operational performance to an organisation is Return on Total Assets (ROTA). The Operating Profit is selected as this is under the direct control of Operational Management within an Organisation. ROTA is an indicator of how effectively a company is using its assets to generate earnings.

ROTA equals Operating Profit (or EBIT) / Total Assets (TA).

Using the DuPont Pyramid Model ROTA can be decomposed to Level 2 ratios by multiplying it by Sales/Sales which is expressed as  EBIT / Sales (or Operating Margin) multiplied by  Sales / TA (or Return on Assets - ROA). The operating profit margin indicates how effective a company is at controlling the costs and expenses of its operations whereas Return on Assets indicates how effectively a business has been making its assets work.

The spreadsheet model below shows how the ratios can be further decomposed into operational ratios that can be assigned to departments or individuals. This concept is important when considering the creation of a new, or updating an existing, Profit Formula in Business Modeling.  By generating a spreadsheet, or using a planning tool, what if scenarios can be created to assist in the modeling of possible outcomes.

 

To understand how KPI’s are derived it helps to be able to visualise how operational performance impacts the Business Goals and Objectives of an Organisation. There are three primary objectives in an organisation:

1. Profitability
2. Growth
3. Stability

These three objectives are financial conditions that reflect the Performance of a Company and its management team. All other objectives support the “HOW” do we achieve these primary goals. When setting goals and objectives they should be SMART (Specific, Measurable, Achievable, Relevant and Time Bound). Too many organisations define objectives with no clear idea as how they are going to be achieved and whether they support the Vision and Goals of the Management Team.

Before considering frameworks for achieving an organisations goals there two approaches that are helpful in understanding how to build performance metrics and define operational ownership. The first is to understand the concept of Ratio Analysis based on DuPont Pyramid Analysis and second is the understand Business Entity Relationships.

Ratio Analysis

Pyramid Ratio Analysis is a way of decomposing Management Ratios. It provides a means of assigning ownership and operational responsibility to the departments and individuals. One of the Key Management Ratios used to measure Operational Performance is Return on Assets (ROA) which is used to measure and analyse the Assets utilised to generate the Profits within an Organisation. The top level ratio is defined as EBIT (Earnings before Interest and Tax)/ Total Assets (TA) or EBIT/TA which is decomposed into the second level ratios by taking into account Sales i.e. (EBIT/Sales) x (Sales/TA). The ratio can be broken down further into lower level ratios which allowing assigning ratios at the departmental and individual levels.

Entity Business Model

The entity-level business model is used to describe the inter-linking activities carried out within a business organisation, the external business drivers and stakeholders that bear upon the entity and the business relationships with persons outside the entity. The items included in the entity-level business model include the following components:

The Business Entity Model is specific to different Industries and Organisations. It provides a common view of an Organisation and enables Processes to structure in a consistent manner providing a framework for comparative analysis. Ratio Analysis provides the means of decomposing Metrics (KPI’s) to allow Management to analyse the impact of Operational Management on the Goals and Aspirations of an Organisation.

In future Blogs I will expand both of these topics.