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How can you identify the financial impact of each activity in your value stream?

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One of the goals of business architecture is to optimize the value stream of an organization, which is the set of activities that deliver value to customers and stakeholders. But how can you measure the value of each activity and its impact on the financial performance of the business? In this article, you will learn how to identify the financial impact of each activity in your value stream using a simple and practical approach.

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Haroldo Monteiro

Chief Financial Officer | Opera??es Financeiras Estruturadas | Turnaround | Consultoria | Treinamento | Conselheiro…
Chris Scott

Director @ Coutts | Chartered CISI, MCBI, MCMI | MSc Commercial Banking | Volunteer | Mentor

1 Define the value stream

The first step is to define the value stream of your business, which is the sequence of steps that transform inputs into outputs that create value for your customers and stakeholders. You can use a value stream map to visualize the flow of information, materials, and resources across the value stream, and identify the key activities, roles, and dependencies involved. A value stream map can also help you spot waste, inefficiencies, and bottlenecks that reduce the value of your output.

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Nadeem Malik

Enterprise Architect - providing enterprise-wide insights, promoting standardization, reducing costs, mitigating risk, increasing agility, realizing strategies, and driving innovation.
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Map your value stream to identify key activities. Assign costs to each based on resources used. Identify value added vs non-value added. Analyze to find waste and bottlenecks. Estimate financial impact of optimizing each activity. Layer metrics to monitor ongoing impact. Continuously improve.

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Md Nazmul Hyder Khan

Head of Finance at Akij Ispat Ltd.
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To identify the financial impact of each activity in your value stream, map your value stream, identify the costs and value created by each activity, and calculate the difference between the two. This will help you to identify the most important activities and focus on improving them to reduce costs and increase value.

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2 Assign costs and revenues to each activity

The next step is to assign costs and revenues to each activity in your value stream, based on the data available from your accounting, budgeting, and financial reporting systems. Costs are the expenses incurred by performing an activity, such as labor, materials, equipment, utilities, and overhead. Revenues are the income generated by delivering an output to a customer or stakeholder, such as sales, fees, grants, or donations. You can use a cost-revenue matrix to organize the costs and revenues of each activity in a table format.

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Chris Scott

Director @ Coutts | Chartered CISI, MCBI, MCMI | MSc Commercial Banking | Volunteer | Mentor
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Don’t forget the cost of doing nothing. The impact on the customer of delays, the advantage you’re handing to a competitor, or the result of not making a decision. Doing nothing is almost always going to have more of an impact than doing something and having to re-adjust your course in the future.

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Nadeem Malik

Enterprise Architect - providing enterprise-wide insights, promoting standardization, reducing costs, mitigating risk, increasing agility, realizing strategies, and driving innovation.
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I agree, when assigning costs, include expenses of labor, materials, overhead. But also quantify opportunity costs - the cost of delays, lost sales, handing advantage to competitors. Doing nothing has a huge hidden cost. Compare costs and revenues of each activity to identify waste and value. Continuously refine data to make optimal decisions. Improvements compound over time.

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3 Calculate the value-added and non-value-added components of each activity

The third step is to calculate the value-added and non-value-added components of each activity in your value stream, using the cost-revenue matrix as a reference. Value-added components are the parts of an activity that directly contribute to creating value for your customers and stakeholders, such as designing, manufacturing, or delivering a product or service. Non-value-added components are the parts of an activity that do not add value to your output, but are necessary to support the value stream, such as quality control, inventory management, or compliance. You can use a formula to calculate the value-added and non-value-added components of each activity, such as:

Value-added = Revenues - Direct costs

Non-value-added = Indirect costs + Waste

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Nadeem Malik

Enterprise Architect - providing enterprise-wide insights, promoting standardization, reducing costs, mitigating risk, increasing agility, realizing strategies, and driving innovation.
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When calculating value-added vs non-value-added costs, focus on direct vs indirect expenses. Directly attributable revenue minus costs equals value added. Indirect costs like quality control, inventory, compliance are non-value added but necessary. Also quantify waste - delays, defects, unused capacity. Optimizing non-value added and waste unlocks biggest potential gains. Continuously refine data and analysis to guide improvement priorities. Small changes compound over time.

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4 Evaluate the financial impact of each activity

The fourth step is to evaluate the financial impact of each activity in your value stream, using the value-added and non-value-added components as indicators. The financial impact of an activity is the difference between its value-added and non-value-added components, which reflects its contribution to the profitability and efficiency of the business. You can use a financial impact matrix to rank the activities in your value stream according to their financial impact, from high to low. A high financial impact means that an activity generates more value than it consumes, while a low financial impact means that an activity consumes more value than it generates.

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Haroldo Monteiro

Chief Financial Officer | Opera??es Financeiras Estruturadas | Turnaround | Consultoria | Treinamento | Conselheiro de Administra??o| Start Up Mentor|Board Member
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Opportunity costs are relevant when you are evaluating an activity. For instance, when analyzing a business unit, you must consider a specific WACC for this unit. Different business units sometimes need other capital structures; therefore, the cost of capital can vary.

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5 Identify opportunities for improvement

The final step is to identify opportunities for improvement in your value stream, based on the financial impact matrix and the value stream map. You can use a SWOT analysis to assess the strengths, weaknesses, opportunities, and threats of each activity in your value stream, and prioritize the actions that can enhance the value of your output, reduce the cost of your input, or eliminate the sources of waste and inefficiency. You can also use a SMART framework to set specific, measurable, achievable, relevant, and time-bound goals for improving your value stream, and monitor the progress and results of your actions.

By following these steps, you can identify the financial impact of each activity in your value stream, and use this information to optimize the value stream of your business. This can help you increase your customer satisfaction, competitive advantage, and financial performance, and align your business strategy with your value proposition.

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Nadeem Malik

Enterprise Architect - providing enterprise-wide insights, promoting standardization, reducing costs, mitigating risk, increasing agility, realizing strategies, and driving innovation.
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Leverage the financial impact analysis and value stream map to identify targeted improvement opportunities. Prioritize with SWOT analysis - what strengths to leverage, weaknesses to shore up, threats to mitigate, opportunities to capitalize on. Set SMART goals to drive changes with greatest impact. Monitor metrics to validate progress. Continually optimize based on updated data and feedback. Small but compounding improvements add up to big impact over time. Stay nimble and keep improving.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you identify the financial impact of each activity in your value stream?

1

2

3

4

5

6

1 Define the value stream

2 Assign costs and revenues to each activity

3 Calculate the value-added and non-value-added components of each activity

4 Evaluate the financial impact of each activity

5 Identify opportunities for improvement

6 Here’s what else to consider

Business Architecture

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How can you identify the financial impact of each activity in your value stream?

1

2

3

4

5

6

1 Define the value stream

2 Assign costs and revenues to each activity

3 Calculate the value-added and non-value-added components of each activity

4 Evaluate the financial impact of each activity

5 Identify opportunities for improvement

6 Here’s what else to consider

Business Architecture

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