Follow this video to understand and utilize the Sustainability widget on the main page of CFO Scoreboard:
The sustainability tool of CFO Scoreboard gives you optics on whether or not your business is growing in a sustainable manner. In effect, the sustainability function is a risk analysis measurement.
A core concept of CFO Scoreboard is this: The primary reason to have assets is to produce (or service) revenue. Revenue (along with how well you control your expenses) is important because it is a primary driver of profits. You can't spend your profits… you can only spend cash, so we measure how productively management is converting profits into operating cash flow.
While it is impossible to predict the future of any business with 100% accuracy, a great indicator of the sustainability, riskiness and overall health of a business can easily be calculated by observing and comparing the growth rate of the assets of the business compared to the growth rate of the revenue (which is “effectiveness’)…. And comparing the growth rate of the revenue compared to the growth rate of the profits (which is “efficiency”)…. And comparing the growth rate of the profits compared to the growth rate of operating cash flow (which is “productivity”).
A well-run business will cascade the growth rates so that operating cash flow is growing at a faster rate than profits…. And profits are growing at a faster rate than revenue …and revenue is growing at a faster rate than assets. As a healthy, robust business grows, it becomes more effective at turning assets into revenue, more efficient at turning revenue into profits and more productive at converting profits into operating cash flow.
A business which has unhealthy characteristics and a questionable future is a business in which assets or head count would need to grow by 50% to produce a revenue increase of 20%... and this 20% increase in revenue only produces a 5% increase in profits…. And this 5% increase in profits produces a 1% increase in operating cash flow. This is a business that is making less and less on more and more.
In the sustainability section of CFO Scoreboard, we compare the growth rates of how effective your assets generate revenue, how efficiently the revenue produces profits, and how productively management is converting those profits into operating cash flow. We measure these growth rates on a long term and monthly basis.
Because some types of companies are primarily service or technology based businesses, there are not always a lot of physical or monetary assets on the balance sheet, so we have two alternative definitions of "assets" for purposes of these calculations.
We look at the number of employees and the amount of payroll as substitutes for the monetary assets on the balance sheet. In a healthy business, the growth rate of employees or the growth rate of payroll should not exceed the growth rate of revenue. If it does, then the business is becoming less and less effective at converting employees or payroll into revenue. A logical extension of this concept is that the growth rate of your number of employees or the growth rate of your payroll “dollars” should not exceed the growth rate of your profits or the growth rate of your operating cash flow.
In CFO Scoreboard, we analyze the sustainability of your business using all three definitions of assets:
1. The physical, monetary asset values on your balance sheet,
2. The # of employees and
3. The amount of your payroll.
All three are useful for getting clear optics on the sustainability of your business.
CFO Scoreboard analyzes both the long-term trend of your business and whether you are getting better or getting worse in the current month compared to the prior month. To get more detail on this analysis , click a metric in the sustainability section of the report to bring up a window that shows more information.
Let’s take the effectiveness of the monetary assets on your balance sheet, as an example.
If the long term growth rate of your revenue is greater than the long term growth rate of your balance sheet assets, as it is in this example, you get a thumb’s up. The graph shows the two growth rates and how they have changed over time. In a healthy, sustainable business, the Revenue line should hover above the monetary or balance sheet asset’s line.
Next, we need to find out if the business is getting better or worse by comparing the most recent month to the prior month – you might have a thumb’s up for the long term, but there might have been a recent deterioration in the last month or two…. we want to catch a problem early so that it can be addressed before it becomes a full blown crisis. To do this, we look at the ratio of Revenue generated by the business divided by the monetary assets of the business in the current month compared to this ratio in the prior month. Comparing these ratios month over month helps us determine if the business is more getting effective or less effective at using its monetary assets to generate revenue. If the ratio is higher this month versus the previous month, as it is in this example, the business is getting “better”. In the Sustainability section of CFO Scoreboard, we also measure the long term and monthly trends for how efficiently the business is converting revenue into profits…. And how productively the business is converting profits into operating cash flow.
The Sustainability analysis is the ultimate blueprint for providing you with optics to see the overall health and riskiness of your business. Pay close attention to these relationships and you will dramatically enhance the value of your company.