Eye Of Whale | Business management consulting

Understanding your company’s profitability

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99% of companies focus on the Income Statement and pay no attention to the Working Capital they consume…

Using only the Income Statement as a criterion, we might conclude that MERCADONA has very low profitability, with an Operating Margin of 3.6% on Sales—far below FREIXENET’s 11.0%…

However, a fundamental pillar of MERCADONA’s business model is that it operates with very low Working Capital relative to its Sales, which significantly boosts its profitability.

MERCADONA S.A. data for 2021: Sales €25,154,320K, Operating Profit €900,425K, and Working Capital €3,779,889K.
Its Return on Capital (“ROC”) = Operating Profit / Working Capital = 23.8%.

If we incorporate the Sales dimension into the formula:
ROC = Operating Profit / Sales × Sales / Working Capital; these are the two axes shown in the video chart.
ROC = 3.6% × 6.7 = 23.8%.

MERCADONA’s Working Capital Turnover (Sales / Working Capital) is 6.7, which significantly increases its profitability and ultimately reflects the high level of profitability the company actually achieves.

MERCADONA’s Working Capital Turnover is 6.7, whereas FREIXENET’s is 0.9 (2020). These are different business models; wineries are highly resource-intensive. As a result, MERCADONA achieves a Return of 23.8%, far higher than FREIXENET’s 9.4%.

💧What is your company’s ROC?

💧What is your business model?

💧Where do you stand on the ROC chart compared to your competitors?

💧Do you have your Working Capital under control?

💧Do you review your Working Capital level every month?

💧Do you have a budget for your Income Statement, your Working Capital, and its financing?

💧Does your CFO understand ROC?

💧Does your Balance Sheet reflect the physical reality of your company?

💧Do you know that a large part of cash flow problems stem from poor Working Capital management?

There are concepts that may be unfamiliar and initially seem complex, but when you see a practical case explained with MERCADONA’s data, their purpose becomes clear. Here, we’ve tried to present the concept of ROC simply to make it easier to understand. That said, it is a highly complex topic, especially because it requires access to quality data once the formula is understood.

We are experts in Business Management and Value Creation, and we help entrepreneurs improve when they have a strong purpose for their company and their employees. Contact us and we can grab a coffee to get to know each other: at EYE OF WHALE, we make the complex simple.

Eye of Whale | Consultoría empresarial

Taking control of time is a fundamental necessity for consulting.

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At EYE OF WHALE, we consider that a consulting firm is a “service production plant”, where personnel costs represent 80% of total costs. Employees’ time is therefore a key driver to monitor the business.

In a consulting firm, it is very common to feel that some clients generate losses, as they consume a lot of time, call frequently, fail to deliver documentation on time, make it harder to meet deadlines, or simply require a level of service that does not match the price they are charged.

Conversely, we also notice that some clients make our work easier, with smooth communication and mutual trust, and we intuitively feel that they are profitable.

However, when you have more than 300 clients and provide around 60 different services, intuition is no longer enough to make sound strategic and operational decisions.

🐳 To move beyond intuition, we have created “THE TIME TRACKING APPLICATION” for every employee—including the manager—which allows them to record, continuously throughout the workday, their activity: what they are doing, for which client, and when the task starts and ends.

This is a revolution based on a humanistic approach, not just the creation of a technical tool. Let me explain: asking each person to record what they do at every moment requires effort, and also involves sharing their “working life” with great transparency. Everyone—owner, manager, and employees—is fully aware that this entails significant responsibility in the use of data.

We operate with a strong purpose 🐳: to use data to build a profitability matrix (Client, Service), and to identify which actions consume the most time and therefore require priority focus to improve process efficiency and make the firm more competitive.

The goal is not to monitor how much time people rest or any personal matters. In fact, we agreed—with the owner, the manager, and the entire team, all together—that if the data is ever used for any purpose other than improvement, the initiative will be immediately stopped and the tool eliminated. This point is non-negotiable.

After 11 months of implementation in the first firm where we deployed the tool, and thanks to outstanding collaboration from the team, we have recorded 18,488 hours—a true treasure.

Now, the manager, using data (date, employee, action, client), meets with clients to explain what is happening, opening the door to solutions. Often, clients ask: “What can I do to help you?” They appreciate the firm’s high level of professionalism and understand that they consume valuable time that needs to be properly billed.