What's the Rave About RONA?

To begin with I must acknowledge that I am not a large fan of RONA. I cognize many of you out there including some clients that I have got worked with are spiritual about RONA. Some similar Rice and some similar potatoes. It certainly have its attributes. It’s about value based management.

RONA stand ups for Tax Return On Net Assets. This bes the Net Operating Net Income after tax divided by the sum of money of cash and working capital demands plus fixed assets. It takes into consideration the assets a company utilizes to accomplish its success.

RONA = Net Income divided by Fixed Assets + Net Working Capital

The higher the return, the better the net income public presentation for the company.

RONA Attributes:

• It can maximise value creation

• Increases corporate transparency

• Aligns managers interest with share holder/owners interest

• Improve internal strategic communication

• Establishes clear priorities

• Streamlines budgeting

WHY I AM NOT Type A BIG fan of RONA

Several things maintain me from being a large fan of RONA.

1. It can make a negative inducement for individual managers to avoid investment in growth. This is especially true when their fillip or inducement is tied to RONA. Branch managers, center managers and other managers may do determinations based on RONA that are not in the best interest of the company’s long term growing strategy. A manager could elect to do his personal fillip on the dorsums of his employees by running too lean. This could cause service problems, client ailments and quality problems just to advert a few. There are other measurings that tin be used just as effectively but I’ll leave of absence that treatment up to you and your CFO.

2. It is an all embracing procedure that often necessitates a civilization change. This almost always necessitates consulting assistance. (Good for our business)

3. It can look complex to center management. Actually for most of management that are not trained in finance.

4. Requires diligent, expressed chief executive officer and Board support

5. Specific RONA value based management preparation is essential

By the way---- just for the record --- the perfect value based management system have yet to be invented or discovered. All methodological analyses have got their drawbacks.