We are currently going through a series of blogs on the types of statements which are more relevant to planning than the traditional financial statements (income statement, balance sheet, cash flow). In the last blog, we looked at the Revenue Statement. In this blog, we will look at another one of the documents to use in their place—the Operations Statement.
The purpose of the Operations Statement is to provide a strategic framework for understanding operations. “Operations” consists of those activities directly related to producing what you sell. Yes, the income statement also has lines describing various costs related to operations. However, the income statement doesn’t tell you why these numbers were chosen and what the strategies are to reach these numbers. That’s why I designed the Revenue Statement.
Since there are so many different types of business models out there, the Operations Statement would need to be tweaked a bit to fit each type of industry. But a rough example can be seen in the figure below.
1) The Baseline
The first part of the Operations Statement is used to determine the baseline. This is what operating costs would be if nothing changed and there were no new strategic initiatives.
As a result, the baseline is more or less a continuation of what you have done in the past. It would be tweaked to correspond to the projected baseline sales volume created in the Revenue Statement (which we talked about in the last blog).
2) Strategic Changes to the Operational Business Model
Strategy is often about change, about adapting to the future. This adapting usually requires business model changes which impact the operations. Change is not just done for the sake of change, but in order to achieve strategic goals. Therefore, one must first understand the strategy goals before embarking on operational changes. Otherwise, you may end up making changes with move you further away from your strategic goals and objectives. That is why the second part of the Operations Statement looks at the impact of strategic goals on operations.
a) Cost Control: One of the simplest strategic goals is to reduce the cost of operations. If that is a goal, then you would place here what the cost control strategy is and how much you expect it to lower operations expenses (by individual operational line). Some of these cost reductions may require up-front capital investments. This amount gets transferred to the Investment Statement (which we will talk about in a later blog). If you plan on using the cost reductions to support price reductions, then those price reductions would be reflected on the Revenue Statement.
b) Quality Improvement: Perhaps a strategic goal is to do a better job of owning the “quality” position in the marketplace. Increasing quality may require adjustments to operations. This is the section where the incremental costs associated with improving quality through operations is outlined. Any anticipated changes to sales as a result of quality improvement would be transferred to the Revenue Statement and any investments needed to improve quality would be transferred to the Investment Statement.
c) Service Improvement: Perhaps a strategic goal is to do a better job of owning the “service” position in the marketplace. Increasing service may require adjustments to operations. This is the section where the incremental costs associated with improving quality through operations is outlined. Any anticipated changes to sales as a result of service improvement would be transferred to the Revenue Statement and any investments needed to improve quality would be transferred to the Investment Statement.
d) Speed Improvement: Perhaps a strategic goal is to do a better job of managing the speed to market (reducing cycle time and getting to market faster). Increasing speed may require adjustments to operations. This is the section where the incremental costs associated with improving quality through operations is outlined. Any anticipated changes to sales as a result of speed improvement would be transferred to the Revenue Statement and any investments needed to improve quality would be transferred to the Investment Statement.
There are many other strategic goals (besides the ones listed above) that could impact operations. They would be handled in a similar manner to those mentioned above. In all of these cases, the important parts to be included on this statement would be:
- What is the strategic goal?
- What changes will occur to operations to achieve that goal?
- What are the incremental financial impacts from these changes:
- Impact to Operations
- Impact to Sales (Transferred to Revenue Statement)
- Impact to Investments (Transferred to Investment Statement)
3) Net Results
The third and final section looks at the net impact of the first two sections on operations expenses. Basically, you take the baseline operational expenses (by line) and add to it changes from cost control, quality improvement, service improvement, speed improvement, or any other new strategic initiatives. The end result is your estimated costs per operational line item for baseline PLUS changes.
The benefits from using an Operations Statement are as follows:
- It proactively links all of your strategies to specific operational activities.
- It quantifies how the implementation of each strategy will impact the costs of operations.
- It separates all of the components of strategy, so that you can critique each one for reasonableness.
- It separates operational issues to its own document, making it easier for those in charge of operations to see what they are being held responsible for.
- It forces one to consider issues beyond cost control when looking at changes to operations.
To more comprehensively understand the operations portion of a strategic plan, it is recommended that some form of an Operations Statement be used. An Operating Statement has three sections:
- Calculation of Baseline Operations
- Calculating Impact of Strategic Initiatives on Operations
- Net Results
You wouldn’t undertake a new strategic initiative unless you believed there was some benefit to doing so. Usually that benefit is either some form of improved external marketplace positioning (which would improve sales), and/or some form of internal efficiency improvement (which would reduce costs). This form helps you incorporate these improvements into your financials. If you are having trouble finding sales or cost benefits from a strategy, you may want to ask yourself why you are bothering to do the strategy at all.