Building Business Acumen
Objectives
 Know and understand what measures are important to the Executive
Team.
 Understand the five business drivers all successful businesses must
focus on.
 Have a better understanding of the company’s financial statements.
 Become a better communicator of company strategy and performance.
 Create an action plan detailing how you will positively impact company
results.
Business Acumen?
• Quickness of perception
• Keen insight
• Mental acuteness
~Wayne Gretzky~
“The Great One”
When asked by a reporter,
“What makes you so great?”
Wayne responded by saying;
“I don’t skate to where the puck is.”
“I skate to where the puck… is going to be.”
3
Pop Quiz
- Answers reflect Integrys data FY2010
35
1. How much Cash was on hand?
______ ($)
2. What was the Cash Flow from Operations?
______ ($)
3. What was the Dividend Yield?
______ (%)
4. What was the Total Revenue?
______ ($)
5. What was the Net Income?
______ ($)
6. What was the Earnings per Share (EPS)?
______ ($)
7. What was the total O&M costs?
______ ($)
8. What was the Authorized Return on Equity (ROE)?
______ (%)
9. What was the % change in Revenue year over year?
______ (%)
10. What was the % change in Net Income year over year?
______ (%)
11. What was the % change in EPS year over year?
______ (%)
12. What was the number of Notices of Violations?
______ (#)
Business Acumen
“When it comes to running a business
successfully, the street vendor and the
CEOs of some of the world’s largest and
most successful companies talk and
think very much alike.” Ram Charan
5-Step Approach per Driver:
Case Study
1. Define the driver.
2. Know how we measure it.
3. Know why it is important.
4. Discover our numbers (& comp).
5. Create an Action Plan.
4
CASH
The Cash Driver is defined as what is needed to
grow and maintain the business.
Measures
Cash is the bills and coins in the register, and cash in the
bank. It also includes cash equivalents, like Certificates of
Deposits (CDs) and other highly liquid investments
(i.e. easily converted into cash within 90 days).
Cash Flow is the cash generation from “core operating
activities” that flows into the business and the cash that
flows out of the business in a given time period, such as a
quarter or a year.
Dividend Yield is how much cash a company pays out each
year compared to the stock price. The Dividend Yield
represents the Return on Investment for the stock.
8
Cash vs. Cash Flow
Pay off loans
Buy furniture
Put it in savings
Benchmark Cash
Integrys Energy
Year:
2007
Total Revenues: $10,292
2008
2009
2010
$14,048
$7,499
$5,203
Wisconsin
Energy
Xcel
Energy
Alliant
Energy
2010
2010
2010
$4,202 $10,311 $3,219
How do we compare?
$456
$756
$306
Net Income:
$254
$120
($68)
$224
Cash:
$41
$254
$45
$179
$25
$108
$159
Cash Flow:
$129
($250)
$1,606
$725
$810
$1,894
$985
0.4%
4.96%
1.8%
6.24%
0.6%
6.48%
3.4%
5.57%
29.9%
2.71%
26.3%
4.26%
7.7%
4.29%
Dividend Yield
Major uses of Cash in 2010:
• $189 million paid in dividends
• $259 million in CapEx
• $202 million in Pension Contributions
9
Impacting the CASH Driver
CASH:
•Pay slower
•Collect faster… with the same sales revenues and costs.
CASH or CASH FLOW:
•Increase revenues/sales
•Reduce/costs
9
• Reduce Waste
• Better training / faster ramp up
• Reduce re-work
• Decrease or better manage inventory
• Manage/Reduce OT
• Vendor Owned/Managed Inventory
• Increase sales/revenues
• Control expenses
• Maintain schedule/deliverable dates
• Don’t hoard (tools, parts, people)
• Increase operational efficiencies
• Reduce/conserve utilities
• Compress A/R – Extend A/P
• Reduce conflicts (systems, people,
processes, IT technologies)
PROFIT
The PROFIT Driver is defined as the money made after
expenses are subtracted from your revenues. It can be
expressed in dollars ($) or as a percent (%). You can
improve profit in three fundamental ways:
1) Increase Sales Price
2) Reduce Expenses
3) Sell more units
The types of expenses you deduct determine which income you
are calculating. Common income calculations include:
 Gross Income: deducts Cost of Goods Sold (COGS)
 Operating Income: deducts COGS, SG&A (Sales General & Admin)
 Net Income: deducts all expenses
10
Revenue – Expense = Income
2010
(in Millions)
Revenues
- Costs of Revenue (COGS)
$ 5,203
$ (3,305)
= Gross Profit/Margin
- Operating & Maintenance expense
- Selling and Administrative expenses (SG&A)
$ 1,898
$ (1,045)
$ (425)
= Operating Income/Margin
- Interest & Other
$
$
428
(151)
$
(56)
$
221
- Income Taxes
= Net Income/Margin
(Also called: “Net Profit” and “Net Earnings”)
36.5%
8.2%
4.2%
High Margin vs. Low Margin
High Margins
Low Margins
33.6%
7.9%
30.0%
3.9%
21.5%
1.4%
WHY?
WHY?
They offer something Unique!
They sell commodities.
“If you’re not unique, you better be cheap!”
To drive Profit($) you need either: High Margin (%) or High Velocity (Volume)
Benchmark Profit
Integrys Energy
Year:
2007
2008
Total Revenues: $10,292 $14,047
2009
2010
$7,499
$5,203
Wisconsin
Energy
Xcel
Energy
Alliant
Energy
2010
2010
2010
$4,202
$3,219
How
do we$10,311
compare?
$456
$756
$306
$254
$119
($69)
$221
Gross Margin: 15.3%
11.7%
25.1%
36.5%
55.9%
49.5%
50.8%
2.5%
$3.50
0.8%
$1.51
-0.9%
($0.91)
4.2%
$2.83
10.9%
7.3%
8.9%
$1.37
$1.58
$2.62
Net Income:
Net Margin:
EPS:
Impact to Margin: Reduce costs and drive operational excellence
- 2009
$290 million after-tax increase in noncash goodwill impairment
- 2010
2% lower natural gas throughput volumes = lower revenues
9% decrease in average heating degree days = lower revenues
$25 million less amortization of regulatory assets = higher costs
11
Growing Profits
• Sell more
• Improve Quality  Strengthen Pricing
• Understand Product Mix
(sell more of the higher margin products)
• Improve execution and up-selling
• Make prudent investments in growth
Increase
Sales
Reduce
Costs
11
•
•
•
•
•
•
Negotiate materials costs
Reduce inventories
Decrease employee turnover
Scrutinize spend on R&D
Reduce/conserve Operating costs
Improve Project Planning
Impacting the PROFIT Driver
PROFIT:
•
•
•
Product Margin: Increase Price and/or Decrease Costs (or both)
Company Margin: Increase Sales and/or Decrease Expenses (or both)
Expressed in Dollars or Percent (Margin)
•
•
•
•
•
•
•
•
•
11
Decrease Re-Work
Decrease/Eliminate waste
Decrease utilities
Reduce shortages
Reduce “emergency” charges
Timely and accurate data (visibility)
Create accurate schedules
Improve operational efficiencies
Better education on costs
• Change requests go through proper
channels
• Increase Revenue - Collect on work
that’s been done
• Increase Revenue – Get quality right
• Faster on-boarding
• Reduce employee turnover
• Improve accountability
• Improve communication
• Effective training
ASSETS
Assets are economic resources owned by a business.
Anything tangible or intangible that one possesses, usually
considered as applicable to the payment of one's debts, is
considered an asset. Simplistically stated, assets are things of
value that can be readily converted into cash.
When evaluating a company’s assets, both strength and
utilization should be considered.
 Return on Assets (ROA)
The percent value of sales (revenues) to Total Assets.
 Authorized Return on Equity (ROE)
The Regulatory Net Income (GAAP Adjusted Net Income)
compared to Regulatory Equity (GAAP Adjusted Equity). Equity
adjustments include items such as Goodwill.
12
Strength vs. Utilization
Asset Strength:
Refers to a company’s
ability to stay viable during
the ups and downs in the
market place.
Asset Utilization:
Refers to a company’s
ability to efficiently and
effectively use its assets to
generate profits.
Organizations must balance Asset Strength & Utilization
Asset Strength Metrics:
• Current Ratio
• Debt to Equity Ratio
13
Asset Utilization Metrics:
• Return on Assets (ROA)
• Return on Inventory (ROI)
• Inventory Turnover
• Return on Equity (ROE)
Assets in Action
The modern charcoal briquette was invented by
automaker Henry Ford. Ford operated a sawmill
in the forests around Iron Mountain, Michigan, in
the years prior to 1920 to make wooden parts for
his Model T. As the piles of wood scraps began to
grow, so did Ford's eagerness to find an efficient
way of using them. He learned of a process
developed and patented by Orin F. Stafford. The
process involved chipping wood into small pieces,
converting it into charcoal, grinding the charcoal
into powder, adding a binder and compressing
the mix into the now-familiar, pillow-shaped
briquette. By 1921, a charcoal-making plant was
in full operation.
Benchmark Assets
Integrys Energy
Year:
2007
2008
Total Revenues: $10,292 $14,047
Alliant
Energy
2010
2010
2010
2010
$7,499
$5,203
$4,202
$10,311
$3,219
$456
$756
$306
$254
$119
($69)
$221
Return on Assets:
2.3%
-
0.8%
5.3%
-0.6%
-3.2%
2.3%
9.9%
Impact to Assets:
- Rate Cases
- Regulated vs. Nonregulated
- Purchase or Sell Assets
13
Xcel
Energy
2009
Net Income:
Authorized ROE:
Wisconsin
Energy
3.5%
How
do we 2.8%
compare?3.3%
6.2%
9.3%
10.9%
Impacting the ASSET Driver
ASSETS:
•Asset Execution = efficiencies, productivity, speed
•Remember…Return on _______
• Improve understanding of priority
• Communicate performance
• Increase efficiencies
(employee/company)
• Increase employee productivity
• Increase performance
• Increase process efficiencies
• Consistent QA/QC
• Share best-practices
• Forecast more accurately
• Execute plans with more discipline
13
• Better communication with other
groups
• Decrease redundancies
• Use resources better within the
company
• Share tools where appropriate
• Schedule more efficiently
• Encourage web meetings
• Don’t over build
• Cross train employees
• Alternative work arrangements
• Improve work flow / planning
Growth
Growth is defined as an increase over a period of time
such as year/year, quarter/quarter, or month /month.
Growth is most commonly measured by:
Sales
Top-Line
Income
Bottom-Line
EPS
Investor
There are two types of Growth:
1.Organic Growth:
Comes from a company’s existing business
2.Inorganic Growth:
Comes from a merger or an acquisition
In today’s business world, no growth means lagging behind
in a world that grows every day…
14
Decline vs. Growth
Business in
Rapid Decline
• Best & brightest leave first
• Productivity goes down
• Morale goes down
• Costs are cut, which limits ability to grow,
and the company becomes less profitable.
Business in
Growth Mode
• Attracts/Retains the best & brightest!
• Productivity goes up = more profit =
more cash = more ability to grow!
• Morale is typically higher.
• You have the ability to grow in your
career!
Benchmark Growth
Integrys Energy
Year:
2007
2008
Total Revenues: $10,292 $14,047
$7,499
2010
Xcel
Energy
Alliant
Energy
2010
2010
2010
$5,203 How
$4,202
do we$10,311
compare?$3,219
$221
$456
$756
$306
$119
($69)
Revenue Growth:
36.5%
-46.6%
-30.6%
2.47%
7.0%
3.7%
Net Income Growth:
-53.1%
-157.9% 417.4%
19.2%
-77.3%
48.5%
41%
6%
20%
Net Income:
EPS Growth:
$254
2009
Wisconsin
Energy
-57%
-160%
411%
Inorganic Growth
- 2007 purchase of North Shore Gas Company and The Peoples Gas Light
and Coke Company
Organic Growth
- Pipe Infrastructure replacement in Chicago (Part of 5-year plan)
expected to take nearly 20 years to complete.
15
Impacting the GROWTH Driver
GROWTH:
•Growth = quarter over quarter or year over year increases in…
•
•
•
Top-Line (Sales) and/or…
Bottom-Line (Profits) and/or…
Earnings Per Share (EPS) for public companies.
•Remember…
Organic growth comes from a company’s existing business
Inorganic growth comes from mergers and acquisitions
• Play a part in culture shaping and
acquisition integration
• Hire talent that is strong and adaptable
• Develop great leaders
• Anticipate employee needs that will
support a growth strategy
• Promote products to everyone!
• Create quality and value
15
• Create customer loyalty
• Provide exceptional service
(Int’l & Ext’l)
• Invest in employees
• Share industry memory/knowledge
• Save cash to put into new programs
• Help transition programs to Production
People
People are the external customers, internal
customers, as well as in-direct influences such as
affiliates, vendors, and suppliers.
Without People…then what happens?
16
Internal People
A’s hire A+’s and B’s hire C’s
What is the #1 reason a person
will leave a company?
External People
“If I would have asked
my customers what they
wanted, they would have
told me a faster horse!”
Henry Ford
Anticipating External People
What companies have failed to anticipate customer
expectations? What were the results?
What limits companies from anticipating their
customers’ wants and needs?
Benchmark PEOPLE
Integrys Energy
Year:
2007
2008
2009
2010
Wisconsin
Energy
Xcel
Energy
Alliant
Energy
2010
2010
2010
Total Revenues: $10,292 $14,047 $7,499 $5,203 How
do we$10,311
compare?$3,219
$4,202
Net Income:
Notices of Violations (NOVs):
# of employees:
17
$254
$119
($67)
$221
1
5
4
2
5,231
5,191
5,025
4,612
$456
$756
$306
4,600
11,290
4,704
Impacting the PEOPLE Driver
PEOPLE:
•People = Customers & Employees
Hopefully you serve your customers well.
How well do you serve your co-workers?
•Anticipation
The best way to meet and exceed people’s needs
is to try and anticipate them.
•
•
•
•
•
•
•
•
•
17
Exceed deadlines
Be positive
Always follow through
Increase vision
Anticipate needs and expectations
Increase quality staffing
Increase employee education
Retain employees
HR: Hire the best!
•
•
•
•
•
•
Listen with empathy to resolve unhappy
customers
Better educate customers
Possess good product knowledge
Increase customer negotiations
Increase customer awareness
Accurately set customer expectations
5 Business Drivers
Mid-Term Exam
18
Can you ignore any of these over
time and still be successful?
5 Business Driver Ranking
Rank the 5 Business Drivers in
order based on the driver you
have the greatest impact /
influence or (based on your
role) is the most important to
the success of Integrys Energy.
1.) Most important
2.)
3.)
4.)
5.) Least important
Be prepared to share your
list with the class.
38
Demystifying the Annual Report
What is the Purpose of the Annual Report?
 General Communication
 Shareholders, existing/potential investors
(others?)
 Important, numbers, decision and strategy
 Where we have been and where we are going
 Marketing
 The what, who and how
 Name, Image & Branding
 Colors
 Compliance
 GAAP
 SEC
21
Integrys Strategic Message
• Financial Hi-lights
• Letter to Shareholders
• Management’s Discussion & Analysis
• Financial Statements
Income Statement
Balance Sheet
Statement of Cash Flows
• Notes to the Financial Section
22
A Letter to Shareholders
5
Demystifying the Annual Report
Financial Statements:
1. Identify the equation.
2. Recognize the purpose of the statement.
3. Locate the key numbers/measures.
4. How do I impact each statement?
CAN YOU READ THIS?
21
Statement Formula:
Revenues – Expenses = Income
Income Statement
Statement Purpose:
Identify Profitability
-3.6%
Revenue Growth
-54.2%
This Yr / Last Yr – 1 * 100
Top-line
-12.2%
-56.2%
-4.8%
Gross Profit
Revenues
- Utility Costs
- Nonregulated Costs
= Gross Profit
$
$
$
$
5,203.2
1,685.5
1,619.8
1,897.9
Net Income Growth
Gross Profit Margin
= Gross Profit / Sales (Revenues)
=$1,897.9/$5,203.2
= 36.5%
24
$5,203.2/$7,499.8
= .69378
- 1 = -0.30622
*100 = -30.6%
This Yr / Last Yr – 1 * 100
Bottom-line
$220.9 / -$69.6
= -3.1739
- 1 = -4.1739
*100 = 417.4%
+ $100
- $100
$100
$83.6
$100
$16.4
$100
$5.68
$34.62
$10.72
$65.38
Statement Formula:
Assets = Liabilities + Equity
Balance Sheet
Statement Purpose:
Identify Financial Strength
Return
Current
on Assets
Ratio
Net Income
Current Assets
/Total
/ Current
Assets Liabilities
= Return
= Current
on Assets
Ratio
$220.9/
$2,050.4
$9,816.8
/ $1,657.8
= 2.25%
= 1.24
Equity Ratio
Authorized
ROE
Total Equity
Net Income
/ Total
Assets
/(Total
Equity
– Goodwill)
=
Equity
Ratio
= Authorized ROE
6,859.8
26
8,944.4
$2,957/
$9,816.8
$223.5/
$2,263.3
= .3012
= 9.87%
x 100
= 30% Equity Ratio
Statement Formula:
Cash In – Cash Out = Net Cash
Statement Purpose:
Identify Cash Management
Statement of Cash Flow
Earn It
Sell/Invest It
Borrow It
28
Navigating the Financials
179
725
2.72
48.83
5.57
5,203
221
2.83
1,045
223.5
($2,905.8 - $642.5)
9.9
5,203
7,499
-30.6 %
221
-67
417 %
2.83
-0.91
411 %
External Factors
• Regulations
– State
– Federal
• Political Environment
– Inflation
– Unemployment
– Interest Rates
40
• Competition
– Suppliers Business
– Investors
• Stock Market
– Stock Price
– Dividend
– Investor dependency
Stock Market Influence
Dividend Yield
2006 – 4.22%
2007 – 4.96%
2008 – 6.24%
2009 – 6.48%
2010 – 5.57%
5 yr. avg. – 5.83%
Market Averages
S&P 500 – 2.67%/2.08%
Overall #308 of 4640
Sector #11 of 123
Industry #7 of 31
“after talking with our
investors, I realized how
much they depend on
the company for their
retirement” Charlie Schrock
Individual Action Plan
Review:
(Page 52)
What new insights did you gain,
as a result of attending?
 Action Plan:
(Page 53)
List the things you can commit to do:
 Cash:
(refer to page 9)
 Profit:
(refer to page 11)
 Assets:
(refer to page 13)
 Growth: (refer to page 15)
 People:
(refer to page 17)
52/53
Retention of Content
Content Retention
Review
Apply
Teach
15%
Time
52
Business Acumen Resources
Books:
•
What the CEO Wants You to Know
•
How to Read a Financial Report
•
Good to Great
•
Keys to Reading an Annual Report
•
Built to Last
Magazines and Newspapers:
•
Wall Street Journal
•
BusinessWeek
•
Fortune
•
Harvard Business Review
Web Sites:
55
•
www.reuters.com
•
www.finance.google.com
•
www.nasdaq.com
•
www.hoovers.com
•
www.yahoo.com
•
www.smartmoney.com
Objectives – How did we do?
 Know and understand what measures are important to the Executive
Team.
 Understand the five business drivers all successful businesses must
focus on.
 Have a better understanding of the company’s financial statements.
 Become a better communicator of company strategy and performance.
 Create an action plan detailing how you will positively impact company
results.
Post Course Business Acumen
1. 7 days:
Teach one of the principals learned in class today,
to someone in your department.
2. 7 days:
Discuss your action items with your manager in the
next 7 days.
3. 30 days:
Read the first 90 pages of:
“What The CEO Wants You to Know“
4. 30 days:
Get with your class partner and give an account of
your progress on your action item(s).
Start now:
 Build and practice your new business acumen skills.
 When making decisions, determine how the outcome
will impact Cash, Profit, Assets, Growth, People…
56
One Final Thought…
“People will work
hard for a paycheck,
harder for a person, and
hardest for a reason.”