Models Are Useful Until They Are Not
Matt Church of Thought Leaders Global recently stated “Models are useful until they are not.” This comment has provoked some thoughts for me.
This statement is probably best illustrated by the financial services industry which has lead to the global financial crisis of 2008 and 2009 relied on some investment models, but unfortunately could not see when they were of no use.
In business (be it small or large) we can get trapped into relying on a model of business, a model of how they service their customers, a model of how what services and products they provide and don’t realise when they are no longer useful.
Within a business people can get trapped with respect to their understanding of various aspects of their business eg. customers. They may have three years ago had an exact picture of what their customers looked like, where they shopped, how they shopped, how they behaved, what the decisions were that they were making, but is that model of their customer still the case today? Or have the customer’s behaviours changed and altered in some way that the business needs to adjust for?
Models are useful until they are not.
When do we recognise when the model that we are operating under is no longer useful? The business needs to have a culture of constantly looking for new information that would enhance their way of operating or mean that they need to change what they are doing. The management of the business needs to have the attitude of being able to be willing to explore all possibilities, to watch the information, but they need to be willing to measure and review the necessary information. If the information that you are looking at is the profit and loss statement and balance sheet, then that’s useless; it gives you no understanding of whether the model under which you are operating needs to change. You need to have a complete and detailed understanding of your customer and exactly know what they are doing to determine whether the model you are operating under is useful.
So models are useful until they are not. Is the model that you are operating under still useful?
By the way I am a Mentor at Thought Leaders Global. If you want to know more individual or organisational thought leadership then please contact me.
Photo:- by woodleywonderworks
How to use metrics to stay focused within a vision.
The secret to stay focused within a vision is to find metrics that make your achievements seem small.
This may seem a little crazy. Often we want to celebrate our and our teams achievements. We don’t want people to lose heart in the goal. So there is a balance to be achieved here.
We can have the various goals that reward and motivate performance along the path but also never lose sight of the vision.
To this end I heard a senior executive of Pandora Radio www.pandora.com stating that despite their magnificent growth figures they still only had about 2% of the total radio hours in the USA. So the metrics of growth, number of new subscribers were motivating metrics along the path but the overall metric of share of radio hours keeps them focused on their long term vision. If there was not the metric of radio hour share then they could be distracted by their achievements. It could lead to complacency.
It is still necessary to celebrate the progress but also staying focused on the vision is important.
What metric do you have to make your achievements seem small and keeps you focused within a vision?
Photo by:- Krisph
Cash Flow Measurements – Some Useful Metrics
As you know from reading my blog, I’m a firm believer that there is one main metric in a business of which we need to focus on. This does not mean that there aren’t other support metrics which can be useful to the management of the business. The one main metric provides an insight to the future whereas the other support metrics usually are financial and provide analysis of what has happened.
Today in this blog post I’m going to cover a couple of cash flow metrics, which give an insight into the management of cash flow in a business.
The first one is cash flow to sales ratio. This is calculated as: -
(Net Income + Non-Cash Expenses – Non-Cash Sales) ÷ Total Sales
This shows cash as a percentage of sales and its variation from the net profit margin is where we need to analyze. If there is a significant positive or negative variance, then we need to look at what is throwing off cash, or soaking up cash.
This metric can be also done on a product or service basis, so that we’re looking at the cash flow generated by each product, to determine whether there are products that are soaking up cash more than they should. Even though whilst profitable we may need to look at how these product lines are dealt with.
The second metric is the fixed charge coverage ratio. This is calculated as:-
fixed costs ÷ by the cash flow as defined above.
In respect to fixed costs these are all the commitments that the business has to meet no matter what happens. So it could be loan commitments, lease commitments, rent commitments on an office space or factory premises etc.
All of the fixed costs that are necessary to the management of the business.
This fixed charge coverage shows how much cash flow is being generated above the fixed cost coverage. It is assumed that if we aren’t meeting our fixed costs then we would not be able to keep our business doors open.
These two metrics are useful in the measurement and management of cashflow.
Photo: Ivan Walsh
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