Difficult economic contexts, every time, put distances between entrepreneurs and differentiation, through competitive advantage, can become one of the most important development levers. Any market correction, whether due to socio-political, fiscal or legislative causes, pales in comparison to "white swans" or "black swans" (cf. Nicholas Nassim Taleb) - exceptional (economic) events caused by factors that can be anticipated – white swans, or exceptional circumstances – black swans, which are almost impossible to anticipate. Therefore, the various approaches to the theory of economic cycles have a common element: cyclicality is an unbeatable constant of private economic life. Periods of contraction, recession, inflation, stagflation or even financial crisis are not exceptions, but constants determined by certain internal or external conditions of different markets.
Well, in this context, as entrepreneurs, the natural question arises – what do we do and how do we react in challenging economic situations? How do we prepare, how do we anticipate, how do we get things in order in our own companies? Also, another natural question from the perspective of evolution, is how do we hide this type of exposure of our businesses, more directly, how do we survive (crises)?
Well, the entrepreneurship market and by extension the management consulting market abounds with theories, entire libraries, authors, practitioners, influencers or gurus who live, abundantly, charmingly and inspirationally, from this segment of business literature. Things, obviously in this area, are divided, not all authors are equal and, of course, not all conjectures that remain after going through a shelf of business literature are invalid. But the central element of business literature of inspirational/motivational origin remains its deep emotional/affective substrate; we rarely speak, in contemporary management, of rational, pragmatic approaches, carefully oriented towards horizons defined by numbers, weights, percentages, processes, objectives and know-how coming from the grassroots - that is, from everyday work at the entrepreneurial level, SME or corporate. That is, the day-to-day work, down to the smallest detail, through which we pursue the profit and economic stability of companies.
Just as accounting is the generally accepted form of communication, verification and reporting to financial authorities, company financial management is oriented towards addressing, regulating and internally amplifying the company's processes, revenues and profits. Since in the absence of competent and genuine financial management, skillfully oriented towards the control of expenses and income, entrepreneurship can very easily become a game of chance. But randomness and chance produce, in most circumstances, chaos - the main enemy of any organization.
Controlling expenses, by using AMF is clear, direct and classified in an intuitive way; thus, the expenditure heading is structurally declined as follows:
Expenditure budget structure
List of expenses
Cost/unit structure & graphical analysis
Within the Expense Budget Structure, they can be structured and customized according to the needs of the company and the organizational chart. Thus, we can have a basic structure of expenses, organized in 3 large sections –
a. Administrative expenses
b. Operating expenses
c. Wages
or we can diversify and customize the categories of expenses so that they perfectly reflect the specifics of the organization down to the smallest detail.
The AMF software application gives you total customization flexibility, the editing functions are friendly, easy to access and use even with minimal training.
The list of expenses represents a particularly important section within the AMF. In this section, each expense of the company is organized according to: category, cost, supplier, description of the expense, invoice number, tax receipt, invoice value/voucher without VAT, VAT amount, invoice total, invoicing date, Month and the year. For maximum flexibility, each expense on the Expense List is accompanied by Edit and Delete options.
Cost structure/unit & graphical analysis
Although it seems an exotic section, the stake of this column is particularly important as it gives us, instantly, a clear percentage structure of each cost associated with each category of expenses; also, to the right of the section, these percentages are visually represented by comparative graphs as clear as possible, and comparative graphs over time of these costs/unit.
Another particularly important element, from a managerial perspective, is the factor of evolution over time that these indispensable visual elements offer us. In this way we can follow the evolution over time of the Main Structure of expenses as well as the Stratification of the categories of expenses.
In general, the fundamental economic philosophy assumes that the more abundant the income, the better it is for the organization. Well, just as the expenses are structured, within the AMF, in the 3 big categories – Expense budget structure, Expense list and Cost/unit structure & graphic analysis, similarly, the incomes are approached through the prism of the 3 perspectives:
The structure of the income budget is particularly important as it offers us an intuitive and quick organization of income sources; and the main argument of this organization is the fact that not all products and services provided by companies generate equal income, on the contrary.
For example, through the flexibility offered by the AMF we can organize the income in 3 large sections: income from the main activity (which can be declined in products and services), income from the secondary activity (which can also be quantified down to the smallest detail ) and Other income (spare parts, adjacent activities, rented machinery, etc.). Of course, in the income section as well, the customization possibilities of Adaptive Management Financial are extremely generous, with each user having the possibility to generalize numerous categories and subcategories of income.
Similar to the expenditure control section and within the Revenue Budget Structure the software application uses the algorithm of differentiating between: Planned Income (Plan), Realized Income (Actual) and the difference between the two. Practically every category of income and every individual income can be analyzed objectively, noting the difference between what we set out to achieve and what we actually achieve, expressed in numbers.
The list of incomes, similar to the List of expenses, is structured comprehensively, according to:
The business management literature approaches competitive advantage, along with differentiation, in various ways. We can talk about competitive advantage in management, at the level of superior features of a product or service as well as we can open the topic of differentiation from the perspective of branding or organizational culture.
From AMD's perspective, through the Adaptive Management Financial software application, strategic management relative to the real-time figures generated by any company, represents the ideal platform through which we can generate differentiation and, consequently, competitive advantage. And this is due to the fact that this approach is determined by the comparative analysis of expenses and income; being connected, in real time, to the image of the company expressed in numbers and percentages, we can obtain the important indicators through which we can generate real value for our customers. And the value offered and felt by customers will have, regardless of the notoriety of the brand and the organization, also an important financial component.
Differentiation and competitive advantage
The business management literature approaches competitive advantage, along with differentiation, in various ways. We can talk about competitive advantage in management, at the level of superior features of a product or service as well as we can open the topic of differentiation from the perspective of branding or organizational culture.
From AMD's perspective, through the Adaptive Management Financial software application, strategic management relative to the real-time figures generated by any company, represents the ideal platform through which we can generate differentiation and, consequently, competitive advantage. And this is due to the fact that this approach is determined by the comparative analysis of expenses and income; being connected, in real time, to the image of the company expressed in numbers and percentages, we can obtain the important indicators through which we can generate real value for our customers. And the value offered and felt by customers will have, regardless of the notoriety of the brand and the organization, also an important financial component.
Competitive products and services are primarily financially efficient even if, for example, in the case of high-end or premium products, the differences between production costs and marketing value are significant. Thus, although it may sound cold, one of the most important principles of contemporary management is the correct and parsimonious management of resources, thereby reducing waste, of whatever nature it may be. However, reducing waste and eliminating financial chaos are the practical foundations on which our team has built Adaptive Financial Management.
In conclusion, differentiation and competitive advantage, from the perspective of modern financial management, are achieved, at the root, through the correct understanding and daily management of the ratio between expenses and income. Because that's how we really know, our position in the market, the vulnerabilities that affect our activity, the areas of growth and development as well as the map of strategic decisions that will lead us to long-term profit.
There are many situations in which companies have capital problems from the perspective of recurring and occasional expenses that will appear in the next period. The existing amounts in the accounts and those to be collected not being sufficient to be distributed to the needs so that they are properly covered.
If this situation, as we suggested above, is not created by payment delays from customers, there are several other potential recurring reasons that should be known in detail in order to be recognized as such and addressed accordingly:
The way it is built and especially how it plays out in reality. An ineffective process consumes, every time, more resources than necessary, generating losses or wasting resources, materials, energy, thus artificially reducing the company's profitability. It should be noted that these losses and waste are often hidden in the prerogative of activities that generate added value and cannot be identified easily.
The difference between revenue per unit of value added and cost per unit of value added is small or non-existent. If we don't have a situation where we've reduced prices a lot to become more competitive with the competition and we're selling at market price, we're obviously facing a spending problem. Either they were budgeted incorrectly, or they are not closely monitored and therefore not controlled, and this fact causes them to fluctuate without, in fact, having a connection with the real need expressed by the costs.
When we talk about activities that involve relatively stable expenses and capacity, for example a restaurant, a fitness room, a medical clinic, a cinema hall, etc. profit is obtained only when the volume of customers served is greater than a certain point (eg: 40% of capacity), point up to which revenues cover expenses (break-even). Even after this point, profitability may be insignificant or low when expenses are not consistently and consistently controlled.
In any company it is desirable to have minimum revenue objectives as well as target objectives that allow the entrepreneur to achieve an anticipated and desired profit. If these revenue targets are not met and there are excess expenses (assumed) to generate the opportunity to reach the respective revenue targets, it is normal for profitability to be compromised.
When we have an operating budget established in such a way that once the income targets are reached profitability will also be reached, we can say that the expenses have been budgeted accordingly, respecting the budgetary discipline guaranteeing the achievement of the profit objective. But real economic life teaches us that plans are indicative and, not infrequently, situations arise that force us not to follow the previously established financial management plan. In these moments it is extremely important to recognize the budgetary slippage and to identify, immediately, stabilization and recovery solutions.
This aspect presupposes, most of the time, the lack of analysis of the yield obtained for the amounts rolled. For this reason, the data representing the nominal or the percentage profit are not sufficient to be able to see all the perspectives of the financial performance; in order to adopt the most educated and inspired strategic decisions within the business, it is important to take several indicators into account.
All the scenarios presented above can be controlled when we have a properly constructed budget and tools capable of showing us the degree of accuracy in terms of budget execution.
Thus, the first point where we can measure the operational performance of the company, and we can do it even in real time, is at the end of the operational process and the financial-operational performance (almost similar to the EBITDA indicator from conventional financial management) shows us how capable the company is to generate profit and consequently control costs to maximize that profit. If at this point the numbers do not look good, it is an illusion to have profit expectations at the end of the fiscal year.
As we said above, at this point of the company's activity, the actual financial performance can be identified and this will facilitate correct, quick and efficient decisions; when the measurement, through Adaptive Financial Management, is done in real time, not only at the end of the month or even towards the end of the next month, when the accounting statements are submitted, the probability of anticipating major budget decreases or imbalances is maximized and the leverage we can generate profit being much more accurate and generous.
AMF (Adaptive Management Financial) is a software built, from the ground up, to facilitate the tracking of all operational financial parameters, thus offering each manager, in real time, the necessary information, correctly structured, to be able to decide and act promptly.
It is gratifying to see so many entrepreneurs who start a business out of a passion or an inspired idea and after a while (months or a few years) end up selling their business or closing it down because the financial result is not brings it closer to the anticipated one or risks disaster, despite the valid idea of entrepreneurial business.
The Adaptive Management Digital team created applications such as Adaptive Management Financial and Adaptive Management Tool to provide Romanian entrepreneurs with useful, valid and robust tools that will allow them to identify and avoid losses as quickly as possible and, at the same time, to orient themselves coherent and sustainable towards profit.
An essential element in the success of the business is its continuous development. Due to the fact that there are no standard recipes for development in entrepreneurship and because "live" trials are too expensive, it is very useful to have a tool that allows us to virtually simulate different key parameters of the business we want to launch.
For example, using the business simulator in Adaptive Management Financial, we can specifically simulate an increase in capacity to understand its impact on revenues and expenses, especially since certain expenses, such as rent, equipment leasing or services externalities, may in fact not be affected. The increase in capacity would certainly also lead to a decrease in the cost per Unit of Added Value due to the distribution of costs to a greater number of units (hours, customer, number of pieces) that end up being monetized. The logic seems simple, but it is necessary to understand exactly "by how much" the financial result changes in case of capacity increase at different levels.
Another relevant business parameter that is recommended to be included in any simulation is that of the efficiency of the main process. Increasing efficiency will certainly improve the bottom line and allow us to either increase revenue (if the market allows us) or reduce costs by reducing resource consumption (if the market does not allow us to sell more). In both situations, we gain in terms of competitiveness, allowing us to be more combative in relation to the competition in the market in which we operate.
Similar to the previous situation regarding the increase in production capacity, it is extremely important to understand the impact on the bottom line of each percentage increase in efficiency or, in the case of negative scenarios, each percentage decrease in efficiency.
The third representative parameter, on the basis of which it is recommended to do business simulations, is that of the effective income per Unit of Added Value. In this context it is useful to understand what is the maximum and minimum margin in the market so that we also understand how much we can realistically estimate to amplify the prices. Thus, we can not only understand how much an increase of a few percent of the actual income influences the final result, but we can also detect the impact of a decrease of a few percent, resulting for example, following a reduction or discount campaign.
For possible more advanced scenarios, we can make simulations involving only 2 or all 3 parameters described above; some parameters can be increased, others can be reduced in different percentages thus identifying how we can compensate for possible unwanted decreases in capacity or income.
It is extremely useful and even necessary to be able to perform valid virtual financial simulations from which we can deduce the results of potential changes in key business parameters.
Through the business simulator integrated in Adaptive Financial Management we can rigorously anticipate potential negative scenarios and also adopt the most effective growth management decisions in case of positive scenarios.
Therefore we get a clear and precise vision of the turnover we can generate as well as the profit we can expect. Good planning exponentially increases our chances of generating very good financial results! For this reason, we have developed this function within AMF and it also allows you to compare two simulations with different parameters - this aspect is highly appreciated by current users of the software.
From our perspective, success is a decision and successful decisions must be made based on the numbers.
During our activity in business management, we often meet quite a few medium and large companies that have not identified, within the operational activity, the "Value Added Unit". Also, within small, entrepreneurial companies, the percentage of those who have defined this essential element, thus relating their operational and financial performance to it, is also very small. We mention that the lack of the Value Added Unit does not necessarily lead to the blocking of the business, but it certainly blocks the clarity and correctness of the decisions of general managers or entrepreneurs, causing direct consequences in the business. Therefore, in most cases, when a company is small and processes low volumes of products, services or customers, it can operate without many managerial tools; but this happens at the "expenditure" in time and stress of those in management.
So, starting from the question - why many organizations do not identify the Value Added Unit preferring to run their business without a common reporting point of income and expenses, the answer is certainly complex, having many explanations and causes that we will not research here. What we can emphasize, however, is the necessity and usefulness of reporting performance and expenses to the most important objective and parameter in a business - the Unit of Added Value.
The Value Added Unit is what the customer is willing to pay when they call on our business. Whether it is the production of a consumer item (furniture, food, maintenance products, etc.), the provision of a service (accounting, marketing, etc.), the provision of facilities (fitness room, real estate, etc.) or any other form of added value for which one is willing to pay a sum of money, there is always a common unit in relation to which the volume of activity and coverage of market demands can be measured. For example, in production activities, this parameter is represented by "Work hours", in service activities it can be "Work hours" for services (eg: marketing, architecture, dentistry, law, or "client" for services consumer-oriented - restaurants, gyms, beauty services, etc.
By understanding and integrating the Value Added Unit in our own business we will be able to orient our resources much more efficiently and clearly so that we will be able to multiply the number of Value Added Units in a cost-optimized way thus and having, of course, expenses as much as possible reduced per unit. Establishing the level of quality that we offer, regardless of whether it is products or services, is directly proportionally correlated with this concept, being also integrated with the structure of internal processes that must also be strictly aligned with what must happen to obtain an efficient and measurable Unit of Added Value.
Ultimately, the company's profit is obtained in practice, by summing up the difference between the income related to the Value Added Units and the costs incurred to obtain them. Thus, when we look at things from the perspective of the Added Value Unit, that is, rationally and objectively, we can conclude that the money obtained is strictly related to the Units actually obtained and delivered to the customer; the expenses are related, in reality, to the number of units actually delivered rather than to the number proposed in the objectives or in the targets of the performance indicators.
Starting from the examples above, from our perspective, it is vital to know how much revenue it brings us and how much it costs us to labor an hour in a production facility, how much it costs us to service a customer, and what is the average revenue earned from of it, how much it costs to produce a Kwh of electricity in relation to its selling price, etc.
From the perspective of the use and integration of the Added Value Unit, it is particularly important to understand what the structure of the cost per Added Value Unit is, along with the monthly evolution of the types of expenses that make it up. In this way, we will be able, on the one hand, to understand the usefulness and necessity of these costs, on the other hand, we will have total control of the costs in the organization, and the natural consequences of this will be not only the (rational) cost optimization elements, but also the visible improvement of the company's competitiveness and profitability.
When it comes to proper business control, it always needs to include financial control. Tracking money from two perspectives – that of income and that of expenses, is the tool by which we can appreciate the degree of health and performance of the organization we lead. This basic tool should exist in any organization, be it non-profit. Even if we are talking about a small or very small organization, the need for the existence of the budget is all the more important considering the limited resources and the need to use them as efficiently as possible.
The concept of "financial budget" is frequently circulated, but we rarely find the concrete way in which it must be structured or built.
Differentiation of income and expenses
The first aspect to consider is the clear differentiation of income and expenses. The main arguments for this differentiation are:
For this reason, we will always start the construction of a budget from the way each business is organized; even if we can have similar structures to other businesses, the budget in its entirety will not be identical, but will be a personalized one so as to generate a maximum effect in the strategic decisions that it will train in the organization.
The second vital aspect that needs to be taken into account in order to have a correctly structured budget is the synchronization of the income budget with the types of products and/or services we offer to all categories of customers with the structure of the income budget and the synchronization of the expenditure budget with the internal processes that generate the products and/or services for the customer; to these are added both the support and administrative processes.
A third key aspect is matching revenue targets with the company's goals and ability to serve customers and setting the maximum level of spending according to the actual needs of the company's operation. In this way we will be able to obtain a realistic maximum of income with an optimal consumption of financial resources and our target profit will be achievable. These correct revenue and expense target settings can help us calibrate our expectations regarding the level of profit the company can generate at the end of the year.
The fourth cardinal aspect is given by the financial analysis indicators that must exist in the company. These indicators must be based on data from the income and expenditure budgets. In the absence of such indicators, we run the risk of having only some income and expenditure lists that tell us at most if we have respected the income and expenditure targets. Although they are two very useful pieces of information for budgetary discipline to guarantee the achievement of the proposed targets, only the indicators obtained from cross-referencing the data and their analysis in relation to the added value offered to customers through the company's products and/or services, give us the complete and correct picture of the financial performance of within the organization.
To understand what is the essential difference between a financial budget from a managerial perspective and an accounting budget, we must start from the reason for the existence of the two instruments. Accounting appeared as a state tool to identify the level of taxes that companies owe to the state budget. The financial budget appeared as a tool of managers in the process of planning and controlling the activity in the company. For this reason, the structure of the financial budget will always be flexible and adaptable to the needs of the company and the management team, while the accounting budget will have a rigid form, formally aligned with the laws governing taxation.
To be able to make correct managerial, strategic or financial decisions, it is necessary to be able to measure the actual performance of the company in money. Also, this is recommended to happen in real time, not at random intervals, be it quarterly or semi-annually.
Conclusions:
A manager's most effective tool is the financial budget correlated with how the business works
The structure of the financial budget must be correlated with the business model and evolve together with it
Relevant information must be visible as easily and quickly as possible
The information provided by the budget and its indicators must help and even represent the foundation of strategic and financial decisions
