In our work we frequently hear entrepreneurs or managers talking about the turnover of the company they lead. This indicator is known and used by most managers and entrepreneurs, being perhaps the most common, but our experience has shown us that most of the time it is only partially known. Why do we say this? Because when referring to turnover, most entrepreneurs refer exclusively to income. But in reality, the turnover that really matters in business is the "effective turnover", also known practically as "operating turnover" or, more precisely, as "operating income". So what is the difference between "turnover" and "effective turnover"? The difference is simple but extremely important.
For a better differentiation, we must say that, in practice, the turnover assumes all the company's revenues and the effective turnover is constituted by the total revenues minus the raw material costs (for example, in the case of an industrial production company, from the revenues total all direct and indirect raw materials are subtracted; in the case of a distribution company we will assume the total revenues minus the value of the products it distributes) or, for service companies we remove from the equation the basic services included in our service (for example a company that sells software has effective turnover equal to total revenue less the cost of making the software applications it sells.)
Why is it more useful to look at actual turnover rather than turnover? Because its relevance resides in the real economic income that we obtain, or rather it is the added value generated by our company, more precisely the one that customers are willing to pay.
Overall turnover can be misleading because it increases or decreases depending on the costs of the raw materials or services we use in our business, not directly conditioning the added value generated by our business. For example, in the period 2020 - 2022, many raw materials, from plastics to raw materials made of metal, wood or even fuels, had major fluctuations, materialized both by accelerated increases and by subsequent decreases. Thus, many companies have experienced significant increases in turnover without actually having an increase in volumes or the number of customers. There have even been companies that have seen an overall increase in turnover in the face of declining volumes or reduced customer numbers. So, at first glance they had a positive business evolution, but if we analyze the actual turnover, we notice a stagnation or even a reduction in the real income of the respective companies. In the case of using actual turnover, fluctuations in raw materials or services integrated in own services do not in any way influence the analysis of the company's financial performance.
How can we build such a budget, oriented towards highlighting the actual turnover? This will not be very different from a conventional budget, but it is recommended to include a structural categorization of the main expenses. It is also recommended that these expense categories be aligned with the company's functional organizational chart, thus making it easier for us to connect expenses with each direct or support operational function. Thus, within the subcategories related to each main expenditure category, it is important to fully align with the process and the sequence of activities/operations included in the process. Thus we will have each segment of the business covered in the budget structure and we will be able to identify, at any time, the level of losses or waste, but this is a topic that we will address in another article.
Within this model, all budget categories are directly related to productive activity. What happens to the value of raw materials or integrated core services? These become a related category of expenses, similar to VAT, advances for settlement, short-term loans; we will title them "Blocked amounts" (blocked because we are going to recover them from the client with the sale of the products or services so that they can later be directed to suppliers to purchase the raw material or services needed for the next business cycle). Therefore, this category of expenses is not taken into account in the analysis of the financial performance of the business activity, but becomes useful only from the perspective of cash-flow control.
Businesses managed according to this model are healthier, more dynamic and much more resistant (antifragile) to economic shocks generated by crisis situations or moments of blockage such as the recently concluded pandemic. Through this model, the accuracy with which the business is understood and coordinated is much greater and much closer to economic reality. For this reason, this turnover is called "effective turnover". Within the Adaptive Management Financial (AMF) application, the category of blocked amounts is preset, along with the category of "capital withdrawals" which also do not represent an effect of the activity that generates added value.
An image of the business as close to reality as possible and as "in real time" is the most useful managerial tool for any businessman and we warmly recommend, to all entrepreneurs, to look at their own business from the most critical perspective, even if this picture is "harder" than the conventional approach or than the accounting analysis.
Good luck in the activity!
What do we do when our organization is in an unfavorable moment, more precisely when we encounter crisis situations? Constantly there are factors that erode our company's results. Sometimes they are visible factors and force us to take immediate action, sometimes they are masked factors that can be overlooked and noticed only when the effects are already very serious. There are also situations when we do not have the necessary knowledge to observe and identify a problematic situation or effectively, also due to a lack of managerial skills, we make wrong decisions that have unpleasant and initially unanticipated effects.
Regardless of the source of the problems, what really matters is the practical and real identification of their causes.
One of these serious problems, very frequent by the way, is the "insufficiency of money" in the company. Except for the situation where the lack of money is only a matter of cash-flow, i.e. invoices not paid on time by customers, the most common situation is the one where the amounts of capital entering the company do not cover the amounts of money leaving the company. The question that always arises in this case is what should I do? Do they increase revenues or reduce expenses? The logical answer is: both!
The peculiarity of this bivalent answer is that in the case of income we do not have total control because it is other people's money and we can only get it under certain conditions and with limitations given by the size of the market, seasonality, etc. Probably, in this chapter every entrepreneur has already done almost everything possible trying to maximize the income obtained. Starting from this reality, we will realize that we only have total control over expenses, being the only ones who establish, through our decisions, the planned and the actual level - of the organization's expenses. Regarding this chapter, that of expenses, there is a principle that it is recommended to keep in mind when we think about committing expenses: "Money from the pocket/account is the cheapest money because we no longer have to work or make efforts to get/possess them!” For this reason we should not give up this resource easily, but be careful to use it only for what is absolutely necessary within the company. It sounds simple, but the "staging" of these principles is not always easy.
When the above principles are met we will result in a clear overview and breakdown of all aspects that generate expenses. At this point we can analyze which of these are necessary in the process and which are not absolutely necessary and can be removed or reduced to close to 0.
At the same time, we can analyze if the current existing expenses are at the required level or are above the optimal level or if they mask losses or waste in the activities for which resources are mobilized.
The information obtained in this way will help us to analyze the efficiency of the process as a whole and will also give us clues about how we can streamline the processes so that they require less resources.
In conclusion, it is necessary to understand very well what is happening in the company in order to be able to control and optimize expenses so that we do not jeopardize the value generated for the customer and, consequently, the generation of income for the company. From our perspective, arbitrary budget cuts should be prohibited!!! In principle, we never cut randomly for the simple reason that there is a real chance that we will lose much more than we save.
The most effective way to have real-time information about all of the above is to use digital tools such as Adaptive Financial Management and track, through them, the level of budget discipline as well as the actual results compared to the targets. It is extremely likely that the use of these tools, accompanied by a rigorous budgetary discipline, will help us avoid the crisis situations identified above for the simple reason that they provide us with all the necessary levers and data to be able to make correct and reasoned managerial decisions. Another consequence of using Adaptive Financial Management is that we will achieve financial stability and predictability.
