Dynamic Revenue and Expenses with Trains and Planes

Copyright 2009change is good

The Dynamic Evaluation, Modeling and Reinvention of the underlying profitability and cash flow of existing organizations

Patrick M. O’Shei

Strategy | ExecutionChange that Matters. Results that Count.™

Making Money with Planes & Trains

2Copyright 2009AIProcessRevis021805v2

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In existing organization’s the revenues and expenses seem to flow from one another…..

profitability (or margins) appear to be a simple function of :

• volume and product mix

• the costs associated with operating the organization

But….

revenues and the costs are two extremely different animals (mechanisms) when examined dynamically

The Mental Models


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Revenue is best modeled by an airplane in flight.

Cost is best modeled by a train rolling full steam down the tracks.

Neither the Plane nor the Train can ever land or stop in an ongoing business.

A Dynamic Model for Profit


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Revenue can:

rapidly change and end immediately!

Revenue can:

come from anywhere

as long as the plane

can deliver goods and services.

Revenue and Flight


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Cost is

driven by design and structure

can only follow the tracks.

Trains slowly build up speed

when moving, momentum makes it incredibly hard to stop.

Cost and the Rails


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Demand is fuel

Sales are forward thrust

Revenue generation is lift

Net revenue is altitude

Price changes are flap adjustments,

Increase to gain altitude

Lower to gain speed

Dynamic View of Revenue


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Profitability or Market share?

In this model,

the leverage comes from understanding where demand is, how to satisfy it

and then

fine tuning pricing to optimize between growth (air speed) and profitability (altitude)

Neither creating a stall nor lowering altitude too low.

Revenue Strategy


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Investment and Operating Expense determine the length of the train.

(credit/cash are coal cars, facilities are freight cars & employees are passenger cars)

Chosen markets determine where the train goes.

The technology employed and product design determine where the tracks are laid.

Structural View of Cost


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Cash/Credit is fuel

Spending is forward movement

Forward momentum is debt

Long trains are harder to start and stop

A train that lacks forward thrust loses sales.

Putting on the brakes plies up debt.

A Dynamic View of Expense


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Pursue Growth or Efficiency?

In this model, the leverage comes from understanding the market

potential and sales pipelinefine tuning between investing for future sales versus carrying just enough resources to meet current sales

Neither underfunding your capacity to move forward nor building-up wasted forward momentum.

Expense Strategy

Dynamic Revenue and Expenses with Trains and Planes

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