Corporate Value Creation: An Operations Framework for Nonfinancial Managers

CHAPTER EIGHT

The Expense Coverage Ratio

CHAPTER 8 TAKEAWAYS

Disciplines of a healthy company: The management of a healthy company will have the courage to subject itself to the following:

• Get the match right between what the customer is willing to pay for (as reflected in the Gross Margin) and how the company is spending money (Operating Expenses).
• Invest in Sales, Marketing, Service and Customer Support, R&D, and Administration while keeping in mind the customer won't pay for inefficient or indulgent expenditures.
• Design the investment programs so they have low-cost exit strategies. Fixed costs or high termination costs should be avoided wherever possible—at least until the viability of the investment has been demonstrated. Extraordinary efforts should be made to minimize long-term commitments and to look for opportunities to outsource even if they are more expensive.
• Constantly and critically review changing customer needs and market conditions.
• Judiciously monitor the progress and continuing relevance of all investment projects, including sanity checks on the match between the objectives of an investment program and the needs to be served.
• Step back and take actions to restore the relationship between Gross Margin and Operating Expenses, especially when an investment has failed to produce the intended result or market conditions have changed.
• If your management team can't quantify what constitutes excellent performance, ask your customers.
• Judgment often turns out to be the ...