Why control the business?
20th century enterprise management lays structures over the business to control the enterprise
The operations and development of the enterprise today are controlled by structures laid over the business for:
- Financial and statistical accounting through a chart of accounts structure
- Financial control through actual compared to budgeted measures
- Cost accounting through activity, center, and product structures
- Capital development control through project structures and asset registers
- Quality control through TQM, six sigma, and other quality structures
The control provided by each of these structures is limited to certain entities and known measures. Financial control covers capital for tangible assets and finances for cash receipts and expenditures against plans or budgets. Cost control is limited to known costs against arbitrary entities like activity or center. Non-financial control is sporadic depending on individual management. Quality control focuses on performance producing selected end-product results.
Accounts record accrued and actual receipts and expenditures from point money comes in to the point money is spent. There is no control of the business cycle from the point money is spent until value is created to enable money to come in. Accounting control is enforcement of rules and principles rather than providing accurate information for business control.
Capital development lumps costs together as a project or tangible asset. The specific capital solutions developed are not controlled and may be lumped together as one large asset or classified as intangible assets. No method or information is provided to plan and control return on specific capital solution investments. Projects are not organized to capture investment costs for implemented solutions and plan value-added to the business from solution utilization. Capital worth numbers are sporadic for some asset and liability solutions, but real capital worth in the capability to produce future business value is unknown.
Each structure is separate from other structures and uses its own terminology and definitions to describe the enterprise. Each structure introduces high costs and much effort to collect and report information. But, none of these overlaid structures can control the actual business.
The actual business must be controlled for each component of the current and planned business
In order to control the business the actual business must be organized, planned, and directed as explained in previous articles. Actual business control is provided by controlling the three components of the business:
- Results: The economic outputs of value produced across the business
- Capital: The investments in capital as specific solutions that must be acquired and developed to provide the capability to produce future results and that must be utilized in business performance to produce actual results
- Performance: The deployment and utilization of a specific capital solution to incur costs and provide effectiveness in producing a specific result in a performance domain
The business can be controlled only by organizing the actual business as current results produced, capital available to the business, and performance in the utilization of the capital to produce results. Result responsibility is controlled against the business organization solution and human personnel solution deployed to manage and produce the result. Capital responsibility lies with the capital result unit manager responsible for developing and supporting the solution. Performance responsibility lies with the performance manager assigned to deploy and ensure cost-effective utilization of the solution.
Business operation controls capital deployed to a performance domain with rules and exceptions for cost and effectiveness measurement in producing a specific result, the economic output results of total cost and value-added produced by business performance, and the proper utilization of capital in business performance. Business development controls capital developed as specific solutions to be utilized by the business to produce results to determine solution worth and development costs to be amortized, and to measure and achieve the return on the investment in the planned added result value.
A strategic business structure must be developed to plan strategic results, capital development required to provide the capital solutions needed, result goals by period to move from the current business structure to the strategic business structure, and performance expectations for the utilization of variable solutions in performance. Budgets are set up as financial, such as value-added, and non-financial, such as volume, result goals and performance costs by time period or performance expectations by performance solution.
The actual business must be controlled for the complete business cycle
Financial control must cover the full business cycle for result value created, performance costs incurred, and result value-added to reach revenues and profits. Cash expenditures are controlled as certain direct performance costs and cash income or revenue receipts are controlled as final result values. Value creation is controlled from the value of input results the enterprise is willing to pay for, the performance costs and value-added to subsequent results in the chain, and the final result value that the customer is willing to pay. Non-financial control covers result volumes and other result production metrics, capital capacity and other capital measures, and capacity utilization and other performance indicators. The diagram below shows use of the business structure to control performance costs and result value.
Quality control covers the effectiveness of each capital solution utilized to produce each result along a result value-quality chain to reach the final result that goes to the customer to provide satisfaction. Performance quality does not exist. Quality is an attribute of results. Performance effectiveness for each solution utilized is managed to control the quality of each result produced. Input result quality is assured in the management of the next result in the chain.
The actual business value creation, performance costs, capital worth, and non-financial data must be recorded
Full financial and non-financial business records must be maintained to record the actual business in the utilization of capital of worth as capital solutions to incur costs and to create value in results. Business transactions are recorded by performance domain for the solution utilized to produce a result in business transactions that update costs, effectiveness, problems, etc to performance domain, capital solution total, and result total records. Capital solutions include all individual human and other tangible and intangible capital items utilized in the business.
Results include end-results produced from performance and higher-level results that are produced from specific lower-level results. Every result has a customer that must be willing to pay a value to have the result produced. The value of all results in a chain cannot exceed the value of the final result that goes to an external customer. Result value-added is result value for the volume of results produced less the total performance costs of all solutions utilized to produce the volume of results. If the value-added of a specific result is negative over time, the result should not be produced unless performance costs can be reduced or the value increased and the value of another result in the chain decreased. Revenue results are produced by final customer results, profit results are produced from final customer result value-added.
Projects are controlled through a project business structure
Projects are controlled by a project business structure that details the “project in progress” or “performance solution developed” investment result in the enterprise business structure. Development costs are captured against project results that are implemented as capital solutions in the business. The unamortized balance of the solution is established by investment costs incurred for solution development and implementation. The unamortized balance is then charged to results that utilize the solution as solution worth declines over the solution life. Capital worth is created in specific solution development to produce specific planned attributable result value-added over the expected life of the solution. Capital worth decreases as capital is consumed, deteriorates, or becomes outdated and increases as capital is replenished, improved, or updated. Return on capital investment in a specific solution is measured in the attributable portion of result value-added produced to date over the solution life. Capital worth is adjusted with performance costs over time and assessed periodically as the expected attributable result value to be created over the remaining life of the solution. Total capital worth for all solutions utilized by the business cannot exceed business worth in the projected business value-added over the business payback period at a cost of capital.
The actual current and strategic business must be controlled for good management and governance
The business is planned for the strategic business results to be produced and capital to be developed and utilized at a strategic horizon of 2-5 years. Result value and cost or value-added goals are planned for final customer results by period to the strategic horizon. Budgets may be developed for the costs or value of results over a planning period. The actual business is reported against current period goals with new strategic estimates. Strategic value creation is managed in actual final result value created against final result value goals by time period to reach approved strategic result value. Corporate governance approves strategic changes and controls the progress to the approved strategic business.
The actual business can only be controlled through Result-performance Management knowledge
Result-performance Management (R-pM) provides the knowledge and means for actual business control of all capital development to eliminate intangible assets and gain return on investments, capital operation to ensure professional support and improvement, and capital utilization in performance to produce value and quality in results.
R-pM concepts for business management may seem involved, since they are new to you. But, R-pM is based on the actual business reality and basic common sense, rather than the contrived 20th century management structures and principles. Business management is learned quickly and becomes second nature as experience is gained. Business controls are maintained by updated application and general ledger systems, with work on one-time set up and exceptions. Business management can be used to maintain necessary 20th century accounts and provide compliance reporting.
Business management enables informed management decisions and control of business change. All business decisions and change involve new results and the performance needed. The business is understood in results produced and capital solutions utilized. All performance costs are known and properly charged to the result produced from performance to know and manage result value-added. Financial and non-financial records are professionally managed as facility records to provide management one set of consistent, complete, and accurate information on the financial and non-financial status of the business.
Business management eliminates the risk and waste of capital investments that provide little benefit. The strategic business structure enables planning and control of strategic value creation and capital development needed to produce strategic results. All investments are planned and controlled to produce specific result value-added to justify the investment. The implementation and utilization of specific performance solutions is managed to assess capital worth, to know development costs, to amortize costs against results produced, and to measure the return on the investment in added result value added over result value-added without the investment.
Business management eliminates the workloads incurred today in controlling against the many structures laid over the business and focuses on control of the actual business in capital of worth developed and utilized, results of value created, and performance costs incurred in the utilization of specific solutions to produce results. Revenues and income are planned and managed through result value management, expenditures are managed through performance cost management, assets are managed through management of capital in solutions of positive worth, and liabilities are managed through management of specific supply and other solutions of negative worth. Enterprise business net worth is managed through management of the worth of all tangible and intangible capital as specific solutions.
Business management is explained and documented in the Business Management Toolkit. The Toolkit provides procedures for actual business management and maintains emerging 21st century management conventions, definitions, and standards. Management consultants who base 21st century business management services on R-pM knowledge are licensed to help enterprises learn, organize, and manage the actual business. Business management knowledge and the Business Management Toolkit are available and supported today at result-performance-management.com.
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