Improving transparency to capital efficiency

Challenge

A leading food and beverage company wanted to develop its financial steering practices to better understand how its invested capital generated growth and profits.​

Return on Capital Employed (ROCE) was considered a suitable metric for this purpose, but before its implementation, the calculation logic needed to be defined and tested.

Brave the Future

August was brought in to 1) crystallize the ROCE calculation logic, 2) test it in practice with real data, and 3) define steering practices to cascade ROCE targets and to follow-up actual ROCE performance across the organization:​

1. ROCE calculation logic design started by separating truly operational business activities and capital employed items (e.g. NWC, fixed production assets) from non-operational activities and items (e.g. cash). The purpose was to create a ‘return on operating capital’ (ROOC) measure for individual businesses​
2. P&L and balance sheet data were then collected to calculate A) Group ROCE and B) ROOC on product category-level. Learnings from data validation were documented and transferred to the on-going ERP development work​
3. We also supported the client to better grasp how responsibilities of ROCE could be cascaded within the organization, and how to in practice manage ROCE in strategic, tactical and operative steering horizons (e.g. with KPIs)

Impact

As an outcome, the client company has now better transparency to its overall capital efficiency and how individual businesses are generating value with the capital invested in them. The company is also now better equipped to cascade responsibility over ROCE’s elements into the organization to further improve capital efficiency.​

Furthermore, the project provided useful specifications for the on-going ERP development work (e.g. data needs for continuous ROCE reporting).