When we think about supply chains and operations performance, it’s important to consider the perspective of the organization as a whole. The metrics that are ultimately the most important from the view of business owners and investors are, you guessed it, all about money!

In this article, we’ll define the three most important financial metrics for a business, and how these relate to those working in supply chain and operations management.

What are the three metrics used to measure financial performance?

Net Profit, Return on Capital Employed (ROCE) and Cash Flow are the three metrics used to measure financial performance that are most important to business owners and investors.

How do you calculate net profit?

Net Profit (also known as Net Income) is Revenue minus Costs. A high Net Profit means maximizing Revenue and minimizing Costs.

Net Profit = Revenue – Costs

What is the formula for calculating ROCE? 

Return on Capital Employed (ROCE) is a financial performance metric used to compare a business’s profit (return) with how much money has been invested in the business (the “capital employed”).

ROCE = Profit / Capital Employed

alternatively,

ROCE = EBIT* / Capital Employed

*EBIT = Earnings Before Interest and Tax

How is “capital employed” calculated?

There are two ways that Capital Employed is calculated:

1. By subtracting the current liabilities of a business from its total assets. Capital Employed = Total Assets – Current Liabilities.
2. By adding the fixed assets of a business to its working capital. Capital Employed = Fixed Assets + Working Capital.

What is Return on Investment (ROI)?

Return on Investment (ROI) can be used in addition to Return on Capital Employed (ROCE) to evaluate the “extra” profit of a business generated by an “additional” investment.

Is a high ROCE good or bad?

A high ROCE is good. Businesses want to maximize their Return on Capital Employed (ROCE) and their Return on Investment (ROI).

Why is cash flow so important?

Cash Flow describes the flow of cash into the business vs out of the business, and the time in between. A high, fast cash flow is best; we want the time in between spending cash and receiving (hopefully even more) cash back to be as short as possible. Businesses want to minimize the time in between buying materials from suppliers, processing them, and then selling products to customers.

Rowtons Training offers a supply chain management training course so you can master this essential area of business operations, gaining a total overview of supply chain management for your manufacturing or service business.

How do these metrics affect those working in supply chain and operations?

Those working in supply chain and operations can sometimes feel distant from the key financial performance of a business, but they often have the biggest role of all. When it comes to maximizing Net Profit, ROCE, and Cash Flow, supply chain and operations performance is key.

How does supply chain and operations management affect profit?

For those in operations, maximizing Net Profit is about maximizing the Revenue that the business brings in and minimizing the Costs that are paid out. This means producing and selling more of a more valuable output, and ensuring that happy customers recommend you and come back to purchase again. It also means reducing the key costs of labor, raw materials, and energy.

For those in the wider supply chain management the role is even bigger. Delivery of the products or services to customers is key to creating revenue, but is also where some of the large costs lie (procurement, transport, and storage to name a few).

How does supply chain and operations management affect ROCE?

In supply chain and operations management, businesses need to not only focus on maximizing profit, but also minimizing the capital tied up in the business. This capital could be tied up in the form of inventory, equipment, buildings, or other assets.

Having more investment and more inventory tied up in the business can be ok, but only if it results in more profit.

How does supply chain and operations management affect cash flow?

Improving cash flow means minimizing the time between spending and receiving cash from sales. For those working in the supply chain, this means moving goods faster through the supply chain. The time from buying materials from suppliers to selling them to customers should be minimized, and the time inventory spent in warehouses, on shop shelves, or in transportation should be reduced to improve the business’s cash flow.

In operations, businesses can improve cash flow by reducing lead times and throughput times, minimizing the time taken for inventory to be processed. This is still true whether the business processes physical materials, customers, or information. For those working in the purchasing and sales departments, negotiating and enforcing good payment terms with suppliers and customers is also critical to maintaining and improving cash flow.

Rowtons Training provides businesses and individuals with supply chain management training courses, alongside our free resources. Want to learn more about the key money metrics for supply chain and operations management? Check out my course: Supply Chain Management A-Z.