Allocating Less Time to Allocations
The allocations process can be time-consuming—especially when you try to iron out the finer details of it. In order to avoid a time-consuming, and often undermining process, you have to focus on making sure the value-focused strategies remain front and center.
Define Success
In order to ensure that the company is operating as it should, you must first get to the bottom of what success looks like. This means answering questions such as, is it better to use fully allocated profit margins or focus more on cash flow? In order to get the bottom of it, it is recommended to use Residual Cash Earnings (RCE).
However, it’s critical not to get bogged down in the analysis part of the allocations process. There will likely be unexpected spending that should be noted, but not obsessed over, as this can lead to endless reviews and analysis. Which can result in more time being spent on understanding a small portion of the allocation rather than focusing on the bigger picture and overall spending.
Tackling Skepticism of Allocations
Getting numbers right can be a challenge when it comes to allocations. While analysts should certainly be doing their due diligence to get the numbers as close to correct as possible, it is the burden of managers to double check the numbers making sure that they are reasonable and defensible in the event that there are changes in the future.
The simplest ways to do this is to clearly identify where allocations may be categorized as an advantage or disadvantage. Keeping the process transparent will encourage others to understand and support the allocations process.
Considerations for Allocations for Measuring Performance
It is said that allocations for measuring performance are incredibly challenging. If not done properly, it can lead to value-destructive actions, which can impact the success of the company. To avoid this, focus on using strategies that promote clear, fact-based answers that are backed up by your analysis.
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