The late Henri Rami’s office is like a den, dark and unique. On one side stands a magnificent oak desk, augmented by an armchair that envelops whoever sits in it. It too is made of oak, reminding the visitor that the company designs and manufactures wooden furniture. On the other side, several chairs and a small round table are reminders of the company’s other principal endeavor, metalwork. Héloïse chooses to sit at the metal table, and thinks to herself that Thierry Ambi would certainly arrive soon. She takes out a folder, and begins to read over her notes.
In the folder’s different colored pockets she has arranged the balance sheets and income statements from the past two years. She recalls the conversation with her mother a few days before, when Juliette explained these to her.
“The balance sheet is a statement of the company’s financial position at a specific point in time. It is usually published once a year, at the end of the year. It is set out in two columns that balance against each other. One side shows the assets, such as buildings, inventory, and cash. The other side shows the liabilities—such as losses, long- and short-term debt, and sums set aside for tax payment—plus the shareholders’ equities, meaning amounts invested by partners. The assets column represents what the company owns, and the other column represents what the company owes. They always balance.”
“Always? They automatically balance?” Héloïse had asked.
“Yes, absolutely, because if there are losses they will show up as debts—loans, for example.”
“So, if I understand you correctly, if Thomas and I had drawn up a balance sheet after we bought our house, the liabilities column would show the principal owing on our fifteen-year mortgage plus the savings each of us contributed to the purchase. On the assets side would be the value of the house, which would match up with the amount in the other column.”
“Yes, that’s it exactly.”
“Then what’s the difference between a balance sheet and an income statement?”
“An income statement measures how a company has managed its financial flow over a certain period of time—a year, for instance. It itemizes all income and also the various expenses incurred. Based on those figures, the result will be a profit or a loss. It can also be useful to do an intermediate analysis of business operations, through calculating the gross margin. To do this, you add up only the costs directly associated with production and sales—such as labor, materials, subcontractors’ fees, advertising, distribution, and overhead—because it will give you an idea of whether the company is being managed well or badly on a day-to-day basis. This is called the cost of goods sold. When you deduct those costs from total revenue, it will give you the gross margin. Then, from that figure, you have to further subtract capital costs—which is to say, interest paid on debts—and tax. The result is the net profit—what’s known as ‘the bottom line.’”
Even though Héloïse had paid attention to her mother’s words with a concentration that wrinkled her brow, the words seemed somewhat abstract. Then she suddenly recalled the sad story her mother had told her a long time ago. It was about her cousin Paul, who got into difficulties with a car-restoration business he had launched on a whim. It had been to Paul that Héloïse entrusted the Fiat 500 her grandmother had given her, when it needed fixing up. Having had to constantly borrow money to finance his inventory, he eventually went bankrupt. He no longer had enough cash, and the capital cost to pay to the bank was eating all the profit even though he had clients who wanted his services.
Héloïse understood and, after a few hours of listening to her mother’s explanations, had learned to interpret the principal financial results of the company. This was how she realized, at the same time her mother did, that although the company made a profit this year of slightly less than €20,000 (almost one percent of the turnover of about €2 million), there would be neither the possibility of increasing wages to keep pace with inflation, nor of hiring anyone new. Paying a dividend to the two shareholders was therefore also out of the question.
The income statement showed excessive spending, which was mainly due to underestimations on quotations to customers. What’s more, the H. Rami company had been existing on credit for two years, with more than 80 percent of its activity financed by short-term loans. And the situation wasn’t getting any better. The balance sheet showed that, compared with the previous year, inventory had increased by 12 percent—an increase mainly due to the purchase of an extra-large batch of exotic wood, for which Henri Rami had negotiated a volume discount. Unfortunately, this wood had not yet found its use. The throughput time was eight weeks; that is to say, raw materials and components purchased took that long a time to emerge from the factory in the form of finished products. In other words, customers had to be patient over two months on average before getting their deliveries.
Her mother, remembering vividly how demanding the company’s customers were, turned pale at this thought and, watching her, Héloïse became pale too. The financial analysis, drawn up by a chartered accountant, was no less mortifying.
8:00 A.M. In one hour, the meeting with the supervisors will start. Thierry Ambi is probably on the way. It’s a little surprising he isn’t already here. She remembers how punctual he had been for the few meetings they had after her father’s death. She had met with him three times. The meetings were all brief, as if he were in a hurry. Apparently, he was very keen to implement the processes for the information system, such as backing up company data, before transferring responsibility to Georgette, the head of accounting.
He explained to Héloïse, “Anyone who is the only one to know how to do something in a company is dangerous. So dangerous,” he added enigmatically, “the company should get rid of him or her as quickly as possible.”2
Thierry Ambi also wanted to complete the physical inventory he had started, in order to analyze the discrepancies between the actual on-hand inventory and the inventory recorded in the computer system. That was especially important now that he had put a process in place that allowed the storeroom supervisor to input data in real time. He was hoping to find the causes for the recurring problems that were causing such discrepancies and solve them so the adjustments would decrease.
“This is very important for an accurate netting process,” he said.
“An accurate what?” she asked.
He thought for a moment before he responded, “Before you bake a chocolate cake, you need to verify that you have all the ingredients: eggs, chocolate, sugar ...”
Héloïse perked up. She did like chocolate cake.
“Suppose you need five eggs for the cake, but you only have two. How many should you buy?”
“Three,” said Héloïse hesitating, “... or more, probably a standard carton of a half-dozen because the eggs will be cheaper and easier to carry. Assuming, of course, I’d be able to use the rest of them soon.”
Thierry explained that subtracting the inventory of two eggs from the gross requirement of five eggs to get the net requirement of three eggs, was actually the netting process. And deciding whether to buy only three eggs, the half-dozen, or to always keep a certain number of eggs on hand, based on typical usage, was the essence of his day-to-day work in managing the supply chain. As well as selecting the right supplier in order to minimize the risk of receiving broken eggs, he had to ensure delivery of the cake to the customer before the expiration date.
Seeing the interest in Héloïse’s eyes, he pulled out a paper from a folder and showed her a drawing of a boat trying to navigate a sea with big waves coming from all sides and rocks right under the surface.
“My job as supply chain manager