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Alan Cowey
Alan Cowey is a Director of Strategic Direction Performance Management Ltd. Formed in 2005 from the merger of the Strategic Direction partnership and Acorn Communications, both of which had been trading since the early 1990s, the company works in areas of strategy and business effectiveness with international companies. The company has been using Celemis solutions since 1995. Prior to his consultancy days Alan worked with international manufacturing organisations in the engineering, confectionery, brewing and packaging industries. His roles incorporate marketing services, business Strategy and Operations.
Abstract Purpose This papers purpose is to address the fact that many intelligent and experienced managers in industry do not really understand about business nance, how prots are generated and what they can do to improve them. This paper shows how the traditional perception problems of dryness, difculty and irrelevance of nance training can be overcome. Furthermore the paper covers how managers can create action plans within their own areas of interest to have an impact on the company performance. Design/methodology/approach This paper describes how physical, board-based simulations can be used to give a learning experience of nance and business in an effective and time efcient way. The paper lists the problems of nance training, explains the means by which a good simulation overcomes these problems, and shows how small performance differences can make a.signicant impact. Findings The post-training research shows that participants nd the experience of nance in a simulation to be very effective in the use of their time, compared to other methods of training. The feedback is also that their knowledge has substantially improved on the key business issues of nance reports, making choices about the use of resources and the need to work together with others to achieve results. Originality/value The paper contains important messages for Learning and Development departments about the methods of nance training and also to operations directors about the ways managers can create action plans to improve the results through a deeper understanding of business. Keywords Finance, Training, Simulation, Action learning, Manufacturing systems Paper type Case study
DOI 10.1108/00197850510626820
VOL. 37 NO. 7 2005, pp. 355-360, Q Emerald Group Publishing Limited, ISSN 0019-7858
PAGE 355
Why do we attend nance training out of duty? Because we believe nance training is:
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dry because it is like school; difcult because I cannot understand the accounts; boring because it is all numbers; and irrelevant because I do not run a company.
A good simulation
Computer-based business games are not new. They have been available for many years. While a game will give a portrayal of business it is not sufcient to give the learning. The participant does not feel part of the business and not always truly connected to what is going on. A good physical business simulation can overcome these problems. What are the characteristics of a good simulation?
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First, the events in the simulation must feel real. Similarly the main events in the real life business must be reected otherwise it seems too simple. The decisions that are made must be recognisable. The assumptions behind the model must be sophisticated enough without being confusing, concise enough without being supercial and credible enough not to be dismissed. The simulation must foster the need for teamwork. No business is run by just one person. The impact of the competition and outside world must be included.
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Figure 1
Participants can see the simulated company. They can see the prots are generated and they can see the money tied up in the company as stock, equipment, etc.
We use a physical, board-based simulation called Decision Basew, developed by Celemi International AB. This simulation helps employees from all business areas understand the business operations, the competitive position, and the limits on your resources so that they can make informed and effective business decisions. The participants have to run the simulated company, modelled on a manufacturing company, and compete for customers and prots. They must confront and handle strategic issues, supply logistics, production planning, and competitor investments. To succeed the participants need to understand the implications of their decisions and understand the impact of one decision on another part of the company.
The key ratio of Return on assets, (ROA) dened as the operating prot divided by the total assets, gives a good measure of the nancial efciency of the company. Most companies use a measure of this sort. We nd it even more useful to show the calculation of this ratio in a diagram, or model, known as the Dupont pyramid or model (see Figure 2). This model graphically shows the ratio of the operating prot compared with the assets used to generate that prot and the components that are linked to generate these key numbers. The items at the top of the diagram are from the prot and loss account; those at the bottom are from the balance sheet. So if the operating prot is 10 and the total assets are 100, then the ROA is 10 per cent. If a company wants to improve its return then it either has to improve the operating prot or reduce the assets used, or both. The Dupont model shows that changes in any component can lter straight down to the benet of the ratio. We encourage the participants to consider the actions that companies can take to improve the ROA. These would include: 1. Strategies that impact the operating prot, such as:
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collecting money from customers quicker; delaying payment to suppliers; reducing the amount of stock involved in the production process; and increasing the usage of all xed assets.
The most powerful part comes at the end of the simulation when a similar exercise is undertaken but with the clients own data. Participants are truly surprised to realise that small changes in, for example, the sales volumes, can make a large difference to the operating prot. An example shown in Table I for a company making 10 per cent operating prot shows the results of small changes. As expected the results are most sensitive to the price changes. A 2 per cent price change, if no volume is lost, has the most impact with a 20 per cent increase in prots. The reverse is also true. If a price decrease of 2 per cent is conceded the prots would go down by 20 per cent and extra volume and cost reductions would needed to compensate the prot loss. This economic reality is often a surprise to participants. The knowledge opens their eyes to the need for incremental change and the need to resist price reductions wherever possible. In the table above the impact if all the small initiatives succeed is staggering at over 50 per cent improvement in prot. This reinforces the fact that if all departments can contribute the total company can improve the results dramatically.
Conclusion
A physical simulation overcomes the barriers to nancial and business learning. The participants enjoy the experience, they understand the business model and they can link to their learning to real and signicant changes in their own company.
Appendix
Figure A1