Financial Analysis: Real Problems


The term financial analysis  when applied to new products conjures up visions of sales forecasts and profit calculations. By using traditional financial analysis, we can get a good read on the current proposal.

 Actually, sales forecasts and financial analysis systems are no problem as such. We have an immense warhead of forecasting methodologies, most based on many years of experience. We know, for example, what makes for sales. This model does an excellent job and serves as the basis for some very advanced mathematical systems used by some of the most sophisticated new product marketers in the world. And every firm has people who can make an income-statement-based net present value calculation (using discounted cash flow methods). We have had years of experience with it.

 The financial model requires product cost, prices, the current value of money, probable taxes on the future income, the amount of further capital investments that will be required between now and when we close the books on the product and much more.

 They will never be certain, even after living out the product’s life cycle. Sales will be known, but we might have had a better marketing strategy. Costs are always just estimates. We will never know the true extent to which a new item cannibalized sales from another product. If we had not marketed the new item a competitor probably would have. And on and on.

 The fact is, we rely on estimated. Management’s task is ot to make the estimates as we can and then manage around the areas of uncertainty in a way that we do’t get hurt too badly.

 On minor product improvements we do this pretty well. On near line extensions, we also do well, but with more misses. Totally new products, using technologies never so applied before, are pure guessing games.

 My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Closed-loop Teams


For years, banks have taken several days, and even weeks and sometimes months to get a decision to a personal loan applicant. The application would be passed around the various departments, traveling at its own pace. A series of supervisors, clerks, and internal mailpeople handled it. Today, aggressive banks take the application directly into a focused, coordinated group—a credit analyst, a collateral appraiser, and a senior personal banker—who decide and respond to the customer sometimes in thirty minutes and always inside a day. This is a small closed-loop team.

 

A closed-loop team includes everyone who is necessary to make the deliverable flow. The team includes all the needed functional people and decision-makers and is self-scheduling. Everyone the team is working for the same objective—to provide the deliverable on time. The team is empowered to make decisions and to act. It has all functions inside it with short lines of communication. Its leader is responsible for its overall performance and for seeing that it gets all the capability, both technicall and human, it needs. All of these are essential to flexibility.

 

The old bank loan approval process was open loop. There was no continuity in the process, no visible standard, little learning between the principles, only occasional feedback on the process, and no one responsible for making it better.

 

In order for the loop to close on a process it must be tightly organized around the deliverable; the same core group must be involved in the process every day; and there must be a working leader on the team.

 

Small teams work better than large ones because large groups create communication problems of their own. It’s best to include only essential functions and to exclude people whose job is peripheral to the deliverable. For example, the bank loan team excludes accounting and records people. Teams have to be self-managing and empowered to act because referring decisions back up the line wastes time and often leads to poor decisions. So the team ioncludes a bank officer because if the officer were not on the team, he or she would be prone to second-guess the group’s decisions. Its better if all the questions are asked and answers are exchanged just once.

 

Closd-loop teams handle variety better than open-loop teams because they can create new information and flexibility.

 

My Consultancy–Asif J. Mir – Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

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