Unit of business and RoI Responsibility
Created on 2018-04-13 10:41
Published on 2018-04-13 12:06
All ERPs starts configuration with defining business and legal units/ entities (also called as segments in some cases) . The rationale behind creating these units of business is that they should sustain and grow independently. This have resulted in the concept of P & L responsibility. The term P & L and Balance Sheet responsibility is not yet widely adopted to the granular level.
Most of the financial problems are arising out of this poorly defined units of businesses and their head's responsibility. If a CEO of unit of business has P & L responsibility then how to measure that part of P & L which is affected due to poor/better performance by balance sheet responsibility beyond his scope. The angel investors/ venture capitalist provide funds for unit of business and wants to track RoI for that unit to know the performance and reward to investor and promoter. While return is part of P & L, Investment is a part of Balance Sheet. Unless there is proper governance and transparency at unit level of business for both P & L as well as Balance Sheet, this measurement is not possible.
This raises two challenges one for Promoter/investor to give (or not to give?) autonomy to unit CEO and the other challenge for CIO to adapt the ERP, BI and MIS tools to harmonize unit level and business level interactions giving decision support for both levels. Let us take the example that cosmetic and pharma are two units of one business. Some of the machinery might be common. Their customers might be same but credit policy for the same customer for cosmetic unit and for pharma unit will be different. Both will try to cross sale and up sale to same customer. The promoter wants funding for scaling up the pharma unit (since it has higher RoI) to be spent on marketing. Obviously the market plan addressing pharma customers will also have to factor offers by other cosmetic unit. Many time investor and promoter also want to test the water before they decide to separate the pharma unit as new legal entity. This phase need strong strategy and business planning team as whole business is at stake if choices are not made in right time and with right business analysis.
Top 5 factors to be remembered while creating business units and measuring RoI
- Decide what will be responsibility of the unit leader (CEO)- Only P & L or P & L and balance Sheet
- Decide the organization structure and clarity of roles and responsibility if one leader is managing both unit
- Decide how the Unit leader with P & L responsibility will interact with Leader handling Balance sheet responsibility for his unit and how the final decision will be arrived when both disagree on some points. Example- providing fund due to increase in credit period to debtors or approving lower P &L target if no fund provided for increase in credit period to customer to match customer/ market demand.
- Agree on Balance Sheet responsibility where unit leader is not allowed to raise funding except by requesting to Business Head of all units or develop new vendors or alter credit terms for debtors etc.
- Define RoI calculation for the unit factoring above areas.
Best wishes to you for your Business Plan/ Budget for the financial year 2018-19 for your business and all of it's units. Feel free to add your comments/ suggestions or write to me if you want to share your thoughts.