Understanding the Drivers of Business
Performance through Variance Analysis
TRI Corp Critical Equation # 2 for Business Leaders
BPI – 3/26/2013
Dr. Thomas E. Conine, Jr. , President TRI Corp
Objectives for Our Session
Understanding TRI Critical Equation #2 on Variance Analysis can:
Enhance your company’s competitive advantage,
Provide pro-active risk management, and
Increase the probability of meeting your commitments.
Our session will introduce you to:
Financial Tools and Terminology routinely used in Op Reviews
Accounting variances; prior year to plan, plan to actual, and prior year to actual
Profit levers; price, volume, cost(inflation/deflation), and productivity
Please Respond in Chat with either Yes or No
Question 1 – Are you familiar with this type of Financial
Tool often referred to as an Op Walk or Bridge ?
Yes
No
Question 2 – Does Your Company Use this type of tool ?
Yes
No
Question 3 – Again Using Chat Price or Volume
Assume your only financial concern is this Quarter’s Net Income. Only
the short-term. You have a product and have the following mutually
exclusive options, either
1) you can raise price by 1%, or
2) you can sell 1% more volume
You can not have both and the Market will accept either at this time.
You have enough capacity should your reply be 2). At the level of 1%
there is also no elasticity to be concerned with.
Do you want ?
Price
Volume
Question 4 – Please Respond in Chat with either Price or Volume
You in an Op Review and are responsible for the following business ….
Plan
Sales
- Cost
Net Inc.
ROS
$100
80
$20
20%
Actual
$ Variance
V%
$90
80
- $10
0
- 10%
0%
$10
11.1%
- $10
- 50%
With the Information you have, did your business most likely miss plan
because of Price or Volume ?
Price
Volume
Price Volume Tradeoffs – Meeting Commitments
Price
Reduction
Volume Increase Required To Maintain Margin $
For A Given Average Price Reduction
Pre CM%
50%
70%
40%
60%
50%
30%
40%
20%
30%
10%
0%
0%
30%
60%
90%
120%
Analysis assumes no variable cost efficiencies with increased Volume… Variable Cost Productivity would
reduce unit volume requirements
150%
Where Do We Look for the Risk ?
TRI’s Simulation and EP Walks – EP Var
The Drivers of Operating Performance
An “Op Review” of Your Business
Actual
V%
VP%
Comments
PY
$1000
909
10.0 950
5.2
600
527
13.8 532
12.8
$400
382
4.7 418
– Depreciation
100
100
0.0 105
– Fixed
200
190
5.2 205
Operating Margin
$100
92
8.7 108
CM%
40%
42%
OM%
10%
10.1%
Plan
Income Statement
Sales
– Variable Costs
Contribution Margin
Price/Volume/Mix
Prod’ty/Supplier Mgt. Miss
Sales Growth in Plan 4.5%
Actual $18 vs. Plan
CM Growth in Plan 9.4%
(4.7) Purchase delayed ( = PY Dep)
Om Growth in Plan 17.4%
(4.3)
(2.4)
Lower infl., delay/cut, pdty
(7.4)
Actual down $8 vs. Plan
44%
11.0%
What were the Primary Drivers of Performance?
Example Walks from
Investor Relations Presentations
Caterpillar Operating Profit Walk
Petrobras OP Variance Walk with P&L Leverage
Note the Impact of the Negative Pricing Power …
Net Rev is Off 5.4% while Operating Profit is Down 26 % …
Sometimes A Risk Beyond Our Control
Toyota Operating Margin Walk with FX
Strength of $ & Euro vs. Yen results in 300 positive FX impact
Pentair – Sales and Operating Income Walk
Pentair Pro forma Walks
Adecco Cash Flow Walk
Final Thoughts
and Questions ?
Flextronics
Dell Finance
TRI-Polar
TRI Virtual Simulations
Microsoft
GE Finance
TRI-Polar
Partnership with
Strayer University and
Jack Welch MBA (JWMI)
Thank You
[email protected]