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Recent updates to this website are listed at the start of the Dynamics Explained section.
BACKGROUND
In uncertain times upgraded, streamlined information helps management teams navigate successfully through whatever lies ahead. Powerful 'dynamic' concepts like BREAKEVEN - in which Business Dynamics specialises - can be used for targeting, planning and monitoring Profitability and Cash Flow adequacy. Similarly, CREDITOR STRAIN for quick detection - and as-near-possible 'real-time' correction - of often well concealed Funding and Solvency problems building up deep within a business. Techniques section.
This Website is for:
1) COMPANY MANAGEMENT TEAMS and all directly or indirectly involved with business: Directors, Non-Executive Directors (NED's), Management, Staff, Customers, Suppliers, Bankers, Investors, Auditors, Training organisations and others.
2) PENSION FUNDS. See separate Pension Section. An Interactive Spreadsheet Model is available paragraph 1 4a) enabling you to experiment with key aspects of pension fund behaviour, longevity, inflation, etc.
3) REGULATORS and STANDARD-SETTERS, Trustees, Pension Protection Fund members and others.
I BACKGROUND
BUSINESS DYNAMICS Limited ('BDL') is a 22 year old business-advisory company based in London England. 'Dynamic' techniques (see Dynamics Explained section) help companies improve profit and cash-flow performance particularly through difficult times. Virtually all sizes and types of business benefit - SME's (Small & Medium sized Enterprises) large, multi-national, owner-managed. Examples given in Section III of Techniques.
Financial issues become more understandable for the non-financial members of the team - in sales, service, design, logistics, R&D, marketing, production, purchasing, human resources etc.
Financial Improvement
The techniques are designed to create profitable, stable, financially-secure companies, also banks, insurance companies, hedge funds, pension funds etc more or less regardless of external economic conditions. See Techniques section.
The techniques also assist control of 'Group' situations, multi-subsidiary companies, multi-company investment funds etc.
Quick Test
Do events in your company have the right 'feel' to them? Do your reports and accounts show results that closely accord with what various members of the management team anticipate? If not remedial action is needed.
'Pattern-Detection'
Fortunately a powerful source of additional help is available. A small range of distinct patterns underlies all financial behaviour. By discovering and comparing patterns of actual behaviour with expected patterns (eg debtor days), reliability, relevance and completeness of information can quickly be determined, often to unusually high degrees of accuracy.
Reassurance
This can be of particular reassurance to executive and non-executive directors, auditors, advisers and others - operating as they do in an increasingly litigious climate; with damaging consequences for issuing, however much in good faith, what later prove to be incorrect, misleading or inaccurate reports and statements; and in particular forecasts (which will be of critical importance for 2008 audits, where an view has to be taken on 'going concern').
Accuracy of Forecasting
'In particular forecasts' - which are of course notoriously difficult to get even approximately right see below. Business, by its very nature operates - indeed positively thrives - in unpredictable environments (where, indeed, its best opportunities lie). See bracketed paragraphs under the 'Self-correcting mechanisms' heading in the separate Pensions Section.
Company Assessment
Management teams (indeed anyone interested in business, or particular businesses) look for answers to questions of the following form:
1) How inherently 'strong' or 'weak' is the business?
2) Is it getting stronger? or weaker?
3) At what rate?
4) If weaker, when will the crunch come?
5) In what direction do we need to aim to become stronger?
6) What ultimate measure of strength do we aim for?
7) How do we get there?
8) How is progress to be measured?
9) How long will it take?
These call for 'dynamic' forms of measurement, identifying movement and change. Particularly rate of movement and change.
Unintended Shortcomings of Existing Information
If you try and use most conventional financial information to answer questions of the above type, the existence and extent of the measurement problem becomes apparent.
Conventional information can only provide a fixed, one-point-in-time view. It is not designed to handle changing values, which can be distinguished as the difference between 'statics' and 'dynamics'. The financial world is largely anchored in the 'static' view.
Scientists and Engineers specialise in understanding and measuring 'dynamics' - the natural behaviour of physical (ie factual) events - and doing so to very high degrees of accuracy. The knowledge is then used to design and operate control systems, capable of making chosen outcomes happen to equally high degrees of accuracy. The same can be done, as easily, in the financial world. As this website demonstrates.
'Dynamic' View Readily Available
Fortunately the 'dynamic' (pattern-behaviour) approach can readily be obtained from conventional 'static' information, provided such information of course remains strictly factual and does not get altered or modified in any way.
If modified, for whatever reason, scope for pattern-detection is instantly destroyed. And ability to unearth, and properly understand, what is really happening in the company.
Control systems not anchored in factual behaviour cannot mirror real-life behaviour (resulting in 'garbage in', 'garbage out'). Use of non-factual systems can result in serious damage being done to the operation (whether company, bank, insurance company, hedge fund, pension fund, etc).
Characteristics of Pattern Behaviour
1) All behaviour has a characteristic pattern
2) Patterns cannot happen by accident
3) Until the underlying pattern is conclusively established (which can be a significant task) nature of the underlying behaviour cannot be reliably determined
4) Conversely, once the relevant Pattern is unearthed, it forms conclusive proof of that behaviour
Patterns Establish:
5) Accuracy and Reliability
6) Completeness, detecting anything missing - "have we got all the information we need to run the company properly?"
7) Events out of pattern. Quickly detecting for instance inadvertent error or deliberate falsification / fraud.
8) Also immediately detecting unexpected, unforecast and unanticipated happenings - WHERE THE MAIN POWER OF THE TECHNIQUE LIES.
Self-test Exercise
To get a feel for the 'immediacy' of the dynamic approach you might like to use the Breakeven-Percentage Scale given at the start of Section II of Techniques to answer the above questions for your own company.
You will see how quickly a view - an accurate and unambiguous view - of what is really happening in your company comes into sharp focus. It may confirm your feelings about the present state of your company. Or may not............
Accurate Identification of Trends
If done for earlier years accurate trends become identifiable. It is then relatively straightforward to ensure business plans, budgets and forecasts are made compatible with these trends (allowing of course for intentional change, like deliberate margin-improvement exercises).
Accurate Forecasting
Once this extra step is taken forecasting becomes an order of magnitude more accurate and dependable. A Plan emerges that can be made to happen. Or at least has a far better chance of doing so.
'Dynamic Targeting and Control'
As an analogy, your company's 'Internal Control' systems begin to mirror those of a well-designed guided missile, programmed to hit its target however much, however rapidly and however unpredictably the target may be taking evasive action (the ultimate 'targeting' challenge. The mechanism of 'Control' works in a different way. See for instance discussion under Digression heading in Pensions section).
Unstructured Environments
Such Control Systems become self-equipped to deal with change. Enabling companies to operate in the most adverse and unpredictable of environments. And gain substantial commercial and financial advantage from doing so. Particularly in relation to competitors with no such systems in place.
'Risk' is an opportunity in business, to be made maximum use of. But does depend on putting the necessary procedures in place. See for instance 'Self-correcting' Mechanisms and 'Perfect Hedge' in the Pension section.
General Applicability
The same can be done for any business. Companies in general become more secure, more dependable, more predictable - for staff, customers, suppliers, investors, bankers. All who deal with them, in whatever capacity.
Related Companies
Similar depth of insight and understanding can be obtained from audited accounts of other businesses (even where information is intentionally or unintentionally concealed): suppliers and prospective suppliers, customers and prospective customers, competitors, acquisition targets.
'Creditor-Strain' Benchmark
Like Breakeven measurement, Creditor-Strain, is another powerful strength/weakness indicator, however deeply concealed in the accounts, as explained in Section IV of Techniques.
'Statics' v 'Dynamics'
An analogy is helpful. Your car's 'statics' are tangible features like height, length, size, weight. 'Dynamics' are intangible:'road-holding', 'momentum', 'acceleration', 'braking-power'. How do you measure such factors? This website explains.
Management teams familiarising themselves with business 'dynamics' consistently outperform.
Ease of Understanding
The techniques are explained and presented in a way designed to appeal to non-financial members of the team - in sales, service, design, production, buying etc - those who by their day-to-day actions and decisions dictate and create their company's financial needs (frequently without realising fully to what extent).
One of the paradoxes of business is that the 'product' members of the management team, who most need to understand what might be called the 'financial dynamics' of their business, are less likely to do so.
Universality
'Dynamic' forms of measurement produce universal benchmarks, allowing widely differing businesses to be accurately compared - the Holy Grail of Regulators and Standard-Setters of course.
As long as efforts are based on 'static' information - fixed values - rather than comparative values - 'dynamic' - achievement of comparability and transparency (perhaps best described as 'immediate understandability') are difficult, if not impossible to portray adequately.
Funding-Problems of Growth.
As an example, in corporate operations it is often a source of puzzlement and anger that just as sales begin to take off, the company suddenly seems to become emeshed in 'cash flow problems'. There seems to be an adverse relationship between profitability and funding-need, contrary to common-sense.
The paradox arises because the size of the growing working capital need (stocks + operating debtors - operating creditors, as explained in the Techniques section), which for a typical manufacturing company might run at 27% of annual turnover or more. The working capital need (plus of course capital expenditure) grows considerably faster than retained profits (for illustration, say typically up to around 5%).
Much simplifying, Banks tend to be constrained by the '1:1 gearing rule', so are only able to lend up to another 5%. Leaving a shortfall. As a result rapid-growth companies nearly always find themselves running out of money as they grow, without in many cases management team members realising, or specifically being able to put their finger on how or why. (Leading to considerable irritation with the bank of course.)
Retained-Profit Benchmark
You can measure your own company's retained-profit-percentage from the balance sheet. Anything less than about 5% for a fast growing company is almost certain to lead to cash flow problems. The faster the growth, the worse the problem.
The faster such companies grow, the more likely they are to run out of money, in circumstances where additional borrowing becomes ever more difficult to secure (in both senses of the word). Rate of retained-profit growth is inadequate to support rate of borrowing growth - as explained in Section II of Techniques.
Information Shortcomings
For reasons already explained, conventional management information is not designed - not structured - to identify core dynamics of this kind, going to the very heart of the way a business, any business, operates. Or designed to flag-up and specifically alert management to the dangers / opportunities arising (both apply) when drawing up forecasts and business plans; and monitoring the subsequent progress of events.
Management teams pressing on regardless, trying to 'accelerate build up of sales' can directly lead to company failure. Over-ambitious expansion was the prime cause of Enron's collapse. Like nearly all companies Enron started honourably. The devices resorted to later were the consequence, not the cause, of the inevitable cash flow crises arising. Which were fully predictable, detectable and measurable in advance (for those alerted to how to do so).
Financial Knowledge
This is one of several examples of how knowledge of cash-flow and profit behaviour is less well-entrenched in management teams than commonly supposed. As already mentioned, those who create the company's financial needs are the non-financial members of the team, so are not ideally placed to detect, or get corrected, what will be for them inadequate information.
'Flying-Blind'
As a result most management teams, to some extent at least, are flying blind. Usually without realising it (which makes the situation additionally perilous of course). It is not their fault, but a feature of the climate and environment in which members of typical management teams are called on to operate.
Regulation
This has a bearing on the form Regulation should take. It should perhaps be designed to ensure management teams are kept properly briefed and informed, so they can run their companies fully effectively.
Fraud
Fraudsters rely on the fact that typical management teams are most unlikely to be fully aware of what going on - allowing the fraudster's activities to continue undetected perhaps for years. The guardians should be the other members of the team, but it is a role they can only play once fully familiarised with the profit, cash-flow and funding characteristics of a normally-operating company. Against which aberrant behaviour stands out in contrast and can be quickly dealt with.
Most fraud starts in a small way. When it goes undetected encouragement is given for it to build and mushroom, perhaps to the extent of overwhelming the company. Which can span considerable periods of time - years sometimes potentially available to detect and head it off.
If potential fraudsters know they are dealing with a financially alert, aware and sophisticated team they are much less likely to start in the first place. Or if they do, it is quickly detected and killed off, while still small - by far the best form of 'control' / 'regulation'.
Reliability of Public Announcements
Another un-nerving consequence of inadequate management information / management knowledge - public company management teams are less well-placed than realised to keep the outside world properly informed about what is going on in their company - or evaluate the implications for the future.
Of particular significance is the requirement to forecast future behaviour with accuracy - the core 'dynamic' of any business - needing accurate knowledge of the dynamics of all other areas of the business.
Regulatory Intention
This may mean that Sarbanes-Oxley and other compliance legislation (eg OFR in the UK) may be directed at a misguided target. The problem is not so much getting reluctant management teams to reveal what they know, but to make sure they themselves possess the necessary knowledge in the first place.
Non-Executive Directors
It is perhaps understandable why, it is claimed, four out of five prospective non-executive directors turn down the job. To their loss. And that of the companies they might so valuably be able to help. But, in present circumstances, justified self-protection.
The Solution
'Dynamic' benchmarks help management resolve the issues - perhaps introduced by the very NED's just mentioned. The two most important are Breakeven [Section II of Techniques]. And Creditor-Strain [Section IV].
Benchmarks that Adjust to Changing Conditions
A key characteristic of dynamic benchmarks is that they automatically adjust to changing conditions (sharp falls in sales for instance). Dynamic Benchmarks / Key Performance Indicators (KPI's) continue to provide management with fast, accurate guidance, however rapidly events may be changing - the very moment accurate 'signposting', accurate 'direction-finding', is most needed of course.
Benchmarks that do not Adjust
By contrast, 'static' targets, like sales targets in a conventional budget, soon get outdated by events, frequently leaving management, to a greater or lesser extent, directionless and floundering in critical times. Or leading to mistaken action being taken under pressure (like cutting margins - see Business Strategy, Section III of Techniques).
Operating in Unstructured Environments
'Dynamic Targeting' is free-ranging. So capable of covering all eventualities. All 'unpredictabilities'. A guided missile is free to roam wherever it needs in order to chase and hit its target (however much the target may deliberately be trying to avoid being hit - the most challenging form of targeting there is of course).
Real-Time Response to Events
Dynamic Targeting enables you to operate your business on a real-time or near-real-time basis, enabling the team to understand, and accurately react to events, as they happen. Indeed, before they happen.
Operating in the Future
What is going to happen next, and how it can be further improved, then becomes the all-embracing focus of management time, attention, planning - and action. The company begins to live in the future rather than base action on the past. A faster, simpler, more predictable form of business operation emerges.
Limitations of Conventional Targeting
'Static Targeting' - the form most conventional budgeting takes - depends on targets being kept fixed, like a target on a rifle range, or scaffolding erected round a building to prevent it 'moving'. (Forming, in effect, a straightjacket!)
"Slow, Complex and Uninspiring"
Static targeting, in its attempt to cover every detail, is inevitably painstaking, time-consuming and complex; and therefore relatively slow, costly and uninspiring to operate, for staff and management alike. It also severely restricts management's ability to replan and retarget, quickly and accurately, in response to structurally changing events.
Unintended Consequences
Static targeting is the form most Regulation takes, imposing often undue burdens, in terms of distraction of management time, attention, effort and 'focus' away from value-creating, mainstream work.
Negative Benefit
Often to little benefit. Indeed the reverse - viz publicly expressed fears that American business enterprise is being 'seriously damaged' by Sarbanes-Oxley. Which is in no-one's interests, least of all Consumers', Suppliers', Staff, Shareholders', the National Economy's - the very 'Interests' the Regulation is designed to foster, project and enhance.
(Self-imposed) 'Risk' considerably Increased
A recent study has found that the dominant worry in business is no longer markets, no longer beating the competition, no longer finance - but Regulation.
'Brutal' All-embracing Watchdog
It is worth bearing in mind that customer-attitude is far more brutal, far more 'immediate', far more 'final' in dealing with aberrant behaviour than any regulation. An incautious remark, lasting seconds, during a Saturday evening dinner resulted in Ratner stores being deserted when they opened for business the following Monday. Drying up of demand led to corporate and personal bankruptcy and 15 years in the wilderness.
Reputational Risk
Again, one of the world's most powerful and successful accountancy firms vanished, without trace, almost overnight, when the Enron story broke.
Well-structured Regulation
Well-structured Regulation should not seek to replicate this all-powerful, all-embracing, immediate, wholly automatic mechanism of the market place. But should in-fill and supplement, as necessary.
Motivational Risk
It needs emphasising, over-burdensome regulation / control methods can seriously damage motivation, enterprise and willingness to take-risks, on which business success so critically depends. And unduly demoralise and demotivate staff, who naturally enough want to get on with the core, value-creating, task of running the business - the over-riding consideration - and not allow themselves to become tied down, Gulliver-like, in paperwork and 'controls'.
Diversion and Distraction of Management away from Central Business 'Thrust'
This is perhaps the greatest danger facing business today. Any diversion of management time, effort, attention - 'focus' - away from mainstream work demotivates and demoralises; blunts enterprise; and threatens business and commercial success to a far greater extent than usually realised, even in apparently 'strong' companies.
Risk-taking an Inseparable Part of Business Success
Successful business critically depends on willingness to take Risk - product and market Risk. Successful entrepreneurs, like Philip Green, take risks on a truly massive scale - the core of their commercial success.
At any one time Philip Green's companies have £1/2 billion of products on the high seas en route to retail outlets. Necessarily ordered up to six months in advance, the moment they hit the shops they have to be exactly right for the ever-changing moods and tastes of a fickle public. If not, they don't sell. "Risk on a truly massive scale".
Regulation designed to deter risk-taking
Most unfortunately, the purpose of Regulation is to deter risk-taking by management teams, backed by stiff personal and corporate penalties.
Creating a culture that, unless great care is taken, can conflict with dynamism of the business.
Consequences
If allowed to happen, the results will emerge, in the decades to come, as businesses lose their cutting edge, weaken and fail - overtaken by ever-stronger competition, racking-up competitive and commercial advantage at their expense.
Good Control
All 'control' methods, including those for running the company, need to be fast, simple, 'dynamic', have a light touch and be capable of accurately adjusting more or less automatically to even rapidly changing events, as they happen.
II APPLICATION
Two main areas:
1) Day-to-day, monthly, annual and longer-term strategic planning and control in companies of all sizes - small, medium, large and multi-national. Leading to improved profitability, improved cash flow, improved funding availability [Section II of Techniques]. More secure, more predictable, more dependable businesses emerge, with lower 'Corporate Risk' profiles.
Corporate Risk Profile
The lower the breakeven point of course the lower the Corporate Risk profile - the most direct and immediate way of reducing 'Corporate Risk' - even in, or indeed especially in, high-risk environments. Lower-breakeven businesses are also likely encounter fewer unwelcome 'surprises' or 'unexpected' cash-flow problems.
2) For the large company, helping management teams avoid getting distracted and bogged down by increasing regulatory, corporate governance and 'internal control' requirements. Freeing them to get on with the central, entrepreneurial-risk-taking job of actually running the business.
Brian Warnes MA (Oxon) Physics FCA FRSA
Managing Director
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