Achieving a Greater Profit from Capital Investment: Monthly Metric Insight
Being the ever-reliable financial guru, here's the revamped guide on boosting your Return on Invested Capital (ROIC). The spotlight shines brightly on this key metric as it reflects the alchemy of a company's productivity and managerial prowess.
ROIC is calculated by the net operating profit after taxes divided by invested capital. Essentially, it measures how brilliantly an organization transforms financial inputs, like shareholder investments, debt, and retained earnings, into profitable results. Finance leaders need to finesse their approach to ROIC just like a maestro pulling the strings in a grand orchestra.
Now, let's take a peek at some benchmarking data from the American Productivity & Quality Center. Organizations operating at the median land around a 15% ROIC, with high performers (75th percentile) reporting an average of 20%, and low performers (25th percentile) hovering at 10%.
To put numbers into perspective, consider Company ABC in 2024. With a net profit of $50 million, an average invested capital balance of $450 million, it clocked an ROIC of 11%.
To ascend the financial productivity ladder, Company ABC must bulldoze its way towards incrementing productivity - profits soaring faster than invested capital. mindHow? Most companies recognize that amplified efficiency plays a significant role but process efficiency alone doesn't guarantee productivity gold.
Business leaders should contemplate the same factors that influence productivity improvements across various business realms: people, places, processes, and technology. Let's take a closer look at each area and tailor strategies to elevate ROIC.
People
Organizations are only as profitable as their people. This gears us to the question, is your company harnessing the full potential of every employee? If not, it's time to dive deep and uncover the root causes of underperformance.
Are staffing levels bloated? Are workloads excessively burdensome? Perhaps staff requires additional training or the chance to grow and innovate within their roles. The financial productivity of your organization is intricately linked to the productivity of its people.
Places
In investment-speak, "places" go beyond the literal geographic location. When investing financial resources, it's crucial to scrutinize where and how the organization operates. Where are goods and services sold? Which locations are ideal for headquarters, regional offices, distribution centers, and other physical sites? Is on-site or remote work more advantageous for employees? Exploring new locations and arrangements could potentially yield substantial financial benefits.
Process
Efficient, manageable processes serve as the backbone of productivity improvements. By streamlining operations, reducing waste, and managing technology upgrades effectively, organizations can gravitate towards enhanced returns on their invested capital and firmer financial management.
Technology
With the human and physical elements optimized, leaders are empowered to intelligently select the most suitable technological tools to automate and enrich work processes.
To sum it up, a high-performing workforce, strategically positioned in the right places, supported by effective processes and cutting-edge technology, is well on its way to manifesting strategic goals and achieving stellar financial performance, consequently translating into a shining ROIC.
By partnering with senior management to prioritize people, places, processes, and technology in investment decision-making, finance leaders set the stage for a more productive organization, making it more adept at transforming capital from shareholders and creditors into remarkable profits and sustaining ROIC.
- ROIC, a crucial metric for a company's productivity and managerial skill, is calculated by net operating profit after taxes divided by invested capital.
- Finance leaders need to finesse their approach to ROIC, similar to a maestro in an orchestra, to maximize an organization's profits from its invested capital.
- According to the American Productivity & Quality Center, high performers typically have an ROIC of 20%, while low performers hover around 10%.
- Company ABC, in 2024, had an ROIC of 11% with a net profit of $50 million and an average invested capital balance of $450 million.
- To improve ROIC, companies must focus on incrementing productivity by considering factors like people, places, processes, and technology.
- Investing in the potential of employees, strategically positioning businesses, streamlining processes, and adopting cutting-edge technology can lead to improved financial performance and ROIC.
- By prioritizing people, places, processes, and technology in investment decisions, finance leaders can create a more productive organization, transforming capital into remarkable profits and sustaining high ROIC.
