From revenues to profits

An explanation of net margins—and what Boeing people can do to improve this metric

BY ANNE EISELE

Earlier this year, Boeing adopted new, aggressive company-level financial targets in revenue growth, net margins, operating cash flow and return on net assets. These targets, known as Enterprise Financial Targets, are aimed at taking business performance to a new level and driving sustained value creation through balanced financial management.

This is the first in a series of four articles that examine the targets and explain how employees can use them to drive performance. Darcel Stewart, director of financial planning and analysis at World Headquarters, recently talked to Boeing Frontiers about net margins.

Q: What do we mean by net margin?

A: Net margin is a percentage that equals net earnings divided by revenues, where net earnings equals revenues minus costs, including taxes.

Net margin is an indication of how effective a company is at managing its costs relative to revenues. The higher the net margin, the more effective the company is at converting revenue into profit. Net margin is one good way to compare companies in the same industry, since they are generally subject to similar business conditions.

Q: Boeing recently set a long-term, companywide target of 7 percent net margins. That's higher than we've ever achieved. Can we get there?

A: Continued focus on execution and lean initiatives will help us achieve this target. Additionally, our long-term business outlook provides a path to get us there. Other top performing companies in the industry such as United Technologies, Rockwell Collins and Rockwell Automation are currently performing at this level.

Q: What can Boeing people and programs do to improve margins?

A: Actions that can affect net margins include improving quality, shortening cycle time and reducing costs.

Improving quality means reducing errors and spending less time correcting problems. By doing things right the first time, we can move more product out the door more quickly.

Shortening cycle time through process or quality improvement means reducing the number of hours it takes to build a product. This means we're paying less money to get that product out the door.

Cutting costs increases margins, too. Generally, anything that makes up the cost of doing business at Boeing, without compromising quality, safety or compliance, is up for reduction where appropriate. Sometimes that's the number of people it takes to do a task, whether on the production floor or in an office. Often reductions can come from process improvements such as automation or common systems. Much of Boeing's costs relate to materials we get from suppliers. Negotiating better terms, consolidating purchases with a single supplier and leveraging business volume can mean a huge cost reduction.

Q: How do net margins relate to the three other Enterprise Financial Targets (revenue growth, cash flow from operations and return on net assets)?

A: If Boeing grows its revenues while holding [fixed] costs flat, that additional revenue will translate into improved margins. In terms of cash, over the long term, cash flow and earnings effectively are equal. So higher margins and earnings ultimately means higher cash flow.

Return on net assets (RONA) is operating profit after taxes, divided by average net assets. As we at Boeing improve profits, we can also improve RONA.

Q: What else should employees know about margins?

A: No matter where you work, there are ways within your control to reduce costs and improve margins. If you work on the factory floor and have a process improvement idea, bring it up. If you're an engineer and have thought of a design change that reduces costs without compromising quality or safety, speak up. If you're going to order office supplies or book business travel, be prudent. It may seem like small dollar amounts, but we have 159,000 employees and it really adds up.

anne.f.eisele@boeing.com