The glossary of the craft of deciding.
Twenty terms that recur in the firm's engagements, defined as an executive uses them: what the term means, what it changes for the decision, and an example.
- Allocation of decisionsA short, written and accepted document stating who decides what, up to what amount, with whom, and who is informed: between owners, board and management, or between the executive and his deputies.
- Break-even pointThe level of activity at which revenue exactly covers all costs. It is calculated by dividing fixed costs by the contribution margin ratio. Also called the profitability threshold.
- Breaking pointFor a given option, the condition whose disappearance makes the option untenable: a level of activity, a date, a client, a person, a price. Every real option is described with its own.
- Cash cycleThe number of days between the moment the company pays and the moment it is paid: client payment delay, plus the time work in progress or stock ties up cash, minus the credit obtained from suppliers, all expressed in days of revenue.
- Client dependenceThe share of revenue concentrated on the largest clients, read together with each client's contractual deadline and renewal terms. The two pieces of information are read together or not at all.
- Cost structureThe share of costs that does not fall when activity falls, within a horizon set in advance, expressed as a percentage of total costs. It results from the line-by-line split between fixed and variable costs.
- Decision questionThe one-sentence formulation of what has to be decided, what it commits, by when, and what one refuses to decide at the same time. It is the product of the first step of the method, framing.
- Handover of leadershipThe passing of effective leadership of the company from one person to another, distinct from the transfer of the estate, with its own calendar, its milestones and the order of its announcements.
- IrreversibilityWhat an option makes impossible to undo, and for how long. It is compared between options in the same way as cost, and should often decide in its place.
- Margin of safetyThe gap between actual activity and the break-even point, expressed as a percentage of activity. It measures the fall in activity a company can absorb before tipping into loss.
- Real optionA path the executive could actually choose, described with its conditions for success, its breaking points, what it makes irreversible and the signal that would indicate it is time to change. The opposite of a foil, that is, an option presented to make the preferred solution look good.
- Real organisationThe way the company actually works: who really decides, who talks to whom, where decisions get stuck, which managers carry the company and which slow it down. It always differs from the displayed organisation chart.
- RestatementA correction applied to an accurate accounting figure to restore the economic reality it does not reflect. It is written down with its value, its source and its year, kept from one year to the next, and does not alter the filed accounts in any way.
- Review scheduleThe date, set at the moment of deciding, on which the decision will be reviewed, and the signals, defined in advance, that would indicate it is time to change. It is the last piece of the fourth step of the method.
- ScopeThe set of decisions, people and results a manager answers for, as written and accepted. Most lasting conflicts between managers come from a poorly drawn scope, not from the people.
- Sensitivity testThe recalculation of a result under a changed assumption, to find out whether the decision depends on it. On the cost split, it consists of moving ten points from the fixed column to the variable column and observing what the break-even point does.
- SequencingThe order of the steps of a transformation, with the owner of each and the schedule of checkpoints, set so that each step is established before the next begins.
- Situation pictureThe description of the situation on which a decision rests, once its three materials have been separated: what is known, what is assumed, and what others have an interest in making one believe. It is the product of the second step of the method, with its blind spots named.
- Sustainable growthThe rate of growth beyond which activity consumes more cash than it produces. It requires two financial years to be established, since it is a variation.
- Unavailable indicatorAn indicator that missing data prevents from being calculated, declared as such together with the data that would unlock it, rather than estimated.
A term that is missing?
Describe the situation in a few lines; the reply is personal.