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La Bourse  /  Volume III  /  Nº III.08  /  Workbook — the Gainshare employee

WORKBOOK — THE LUMINOUS GAINSHARE EMPLOYEE

Chapter III.08 · Velocity, Circulation, and Health

For the person working inside a gainshare arrangement — where a defined share of verified improvement returns to the people who created it. This chapter is about circulation, and circulation is the one part of a business where the people on the floor can see the mechanism more clearly than the board can.

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WHY THIS CHAPTER IS YOURS

A gainshare is a written promise with four parts: a baseline, a measure, a share, and a period with a named verifier. Everything in this workbook is about the second part, because circulation gains are notoriously easy to claim and notoriously easy to have taken away from you — and both happen for the same reason.

The reason is that velocity is a residual and retention is a measurement.

If your scheme's measure is a rate — cash turns, spend velocity, inventory turnover, days-something-outstanding — then it has a denominator, and whoever controls the denominator controls your gainshare. A denominator can be redefined for entirely honest reasons and your pool will move without anyone touching the work. This is not a hypothetical: a whole national money-stock series was redefined in April 2020 and the associated velocity figure fell 77.2 percent in one quarter, from 5.382 to 1.229, with about 79.6 percent of that fall attributable to the redefinition and not one transaction changing hands.

If your scheme's measure is a stock — working capital released, cash freed, spend landing inside a defined boundary — then it is a quantity with a unit, it cannot be improved by redefinition, and it is yours.

The one sentence to carry into every scheme meeting: claim stocks, not rates.

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PART ONE — DISCOVERY

Weeks 1–4: find where the circulation gain actually is

Exercise 1.1 — Read your own scheme document against the residual test (2 hours)

Answer in writing:

1. Is the measure a stock or a rate?
2. If it is a rate, what is its denominator, who defines it, and what is the procedure for changing it?
3. Has the denominator changed in the last three years? Ask directly.
4. What happens to the baseline when a gain is realised?

Question four decides whether the scheme is worth being in at all. If the baseline resets to the improved level every period, you are on a treadmill — each gain raises the bar you are measured against. A well-designed scheme holds the baseline for a stated term or ratchets on a published schedule everyone can see coming.

Question two decides whether your gain can be taken back without anyone deciding to take it. That is the specific risk this chapter exists to name.

Exercise 1.2 — The four places circulation gains hide (one week)

You can see all four from the floor. The executive can see none of them without asking you.

Write down one example in each row. Put a pound figure against it if you can and the word unknown if you cannot. Unknown is a finding, and it is worth more than a guess.

Exercise 1.3 — Find the supplier who is financing us (half a day)

Somewhere in your supplier list is a small firm carrying sixty days of your receivables at a cost of capital far above your employer's. Find one. If they bill £2,000,000 a year, they are carrying £328,767 of your working capital; at ten-day terms that would be £54,795, releasing £273,973.

At a 9.0 percent cost of capital, that stock is costing them £24,658 a year. Your employer's funding cost for paying fifty days early on the same volume is £15,068. The gap between those two numbers is a real gain that currently belongs to nobody, and identifying it is a contribution with a pound sign on it.

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PART TWO — THE ARITHMETIC

Weeks 5–8: compute what you are owed

Exercise 2.1 — Price the gain you found (2 hours)

Take the early-payment case through to a number both sides can check:

  supplier's cost of that capital at 9.0 %           £24,658
  discount taken by us, 0.9 % of revenue             £18,000
  our funding cost, 50 days at 5.5 %                 £15,068
  supplier better off                                 £6,658
  we are better off                                   £2,932
  annualised discount   0.9 × 365/50            =       6.57 %

The verified gain to your employer on this single supplier is £2,932 a year. That is the number that enters a gainshare pool. Scale it across the cohort in the same arithmetic and you have a claim that survives verification.

Exercise 2.2 — Compute the programme's decision number (1 hour)

Know it before the meeting, because it is what will be used to refuse or approve the whole thing:

  volume paid early                £20,000,000
  average balance outstanding       £2,739,726   (20,000,000 × 50/365)
  running cost                         £30,000
  running cost, annualised                1.095 %
  gross spread 9.0 − 5.5                  3.50 points
  net spread                             2.405 points

Below about one and a half points of gross spread, the administration eats the trade. If you know this number you are the person in the room who understands the mechanism, and that is a different standing from the person asking for a share of it.

Exercise 2.3 — The retention arithmetic, for the claim you will make (2 hours)

If your scheme measures local spend, learn these three lines properly:

  LM3 = 1 + r + r²        L = 1/(1 − r)        dL/dr = 1/(1 − r)²

On £12,000,000 of third-party spend, moving retention from r = 0.22 to r = 0.45 takes LM3 from 1.2684 to 1.6525 — from £15,220,800 to £19,830,000 of local income over three rounds, a difference of £4,609,200 a year. Round two alone moves from £2,640,000 to £5,400,000.

But claim carefully. That £4,609,200 is local income, not your employer's profit, and a gainshare pool is funded from margin. A claim that confuses the two will be refused, correctly, and it will cost you credibility on the claim that would have been paid. The claimable figure is the margin effect: the early-payment spread, the rework avoided, the freight saved on a shorter chain — each with its own line.

Exercise 2.4 — The convexity, and what to ask for (1 hour)

dL/dr is 1.644 at r = 0.22, 3.306 at 0.45 and 25.000 at 0.80. Retention is convex: the last points are worth the most.

So when a target is written as a flat "five points a year", ask for the target to be written against value instead. A flat target caps your pool exactly where the arithmetic says the gains start getting large — and it is usually written that way by accident rather than by design, which means it can be changed by showing somebody the three numbers above.

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PART THREE — DESIGN

Weeks 9–11: make the uncounted countable

Exercise 3.1 — Write the baseline you want (half a day)

A baseline for a circulation gain has four elements. Draft all four before anyone asks you for them:

1. The stock, in its unit. Working capital released, in pounds. Not turns.
2. The boundary, if the measure is local spend, with the multi-address rule.
3. The coverage. What proportion of total spend the measurement covers, and what it does not. State your own denominator before someone else does.
4. The verifier and the period. Internal audit is sufficient and is usually free.

Exercise 3.2 — Protect the denominator (one conversation)

Ask for one clause: the definition of the measure and its boundary may not be changed within the scheme term without a written variation agreed by both parties. This is the single most valuable sentence you will ever get into a gainshare document, and it is nearly always granted, because from the other side of the table it costs nothing.

Exercise 3.3 — Build the evidence as you go (ongoing)

A gain evidenced after the fact is arguable. A gain evidenced continuously is not. Keep a dated file with the before-figure, the intervention, the after- figure and the name of the person who confirmed each. Ten minutes a week.

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PART FOUR — DESTINY AND DELIGHT

Weeks 12–13: make it hold

Exercise 4.1 — Get it into the standing pack (one hour)

Anything reviewed monthly persists; anything reviewed by exception does not. Getting the released-working-capital figure onto the standing pack is worth more than any presentation you will give about it.

Exercise 4.2 — Recruit the suppliers (one week)

A supplier with £273,973 of working capital back will defend the arrangement more energetically than anyone inside the building. Build the constituency outside it. This is the most durable protection a circulation gainshare has.

Exercise 4.3 — The second owner (one conversation)

One person is a hobby; two is a practice. Recruit your second owner by giving them the credit for the first verified result.

The delight, which is real. There is a particular pleasure in the moment a supplier — someone running eleven people out of a unit on an industrial estate — tells you what they did with the money that came back when the terms changed. It is never what you would have guessed. That is what circulation actually is, and it never once appeared in anybody's chart.

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HOW THE LEDGER WORKS

The mechanism, from the inside, in the order the money actually moves. Learn this and you will never again be told that a gain "was already in the plan".

One — the stock is identified and dated. Somebody writes down that supplier X carries £328,767 of our working capital at 60-day terms. That figure has a date, a source (the purchase ledger), and a name against it. This is the baseline entry, and it is created before anything changes. A gain whose baseline was written afterwards is arguable forever.

Two — the intervention is recorded as a variation. Terms move to ten days. The signed variation is the evidence that something happened and when. Keep a copy in your own file, because the procurement system will archive it and the scheme verifier will not go looking.

Three — the effect is computed as a stock. Receivable falls to £54,795; £273,973 is released. Note carefully what is not claimed here: the 6.08 to 36.50 change in turns is real and it is not the gain. The gain is the stock.

Four — the margin effect is separated from the circulation effect. The gainshare pool is funded from margin, so the claimable line is the £2,932 of verified benefit on this supplier, not the £273,973, and not the £4,609,200 of local income the retention change would generate over three rounds. Claim the right line and you are paid. Claim the large one and you are refused, and the refusal costs you the small one too.

Five — the verifier signs, in the period, against the definition. Internal audit checks the before-figure against the ledger, the variation against the contract file, and the after-figure against the same ledger query. If the definition has not moved, this takes an afternoon. If it has moved, it takes a negotiation, and that is precisely why the fixed-definition clause in Exercise 3.2 is the most valuable sentence in your scheme document.

Six — the share is applied and the baseline is handled as written. Whatever the document says about ratcheting happens here, visibly. If nobody can tell you in advance what happens at this step, that is the finding, and it is worth more than this quarter's payment.

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KNOW YOUR SCHEME — A CHECKLIST

Take this to the next scheme review and get an answer to every line.

A blank line is not a failure of the scheme. It is the most valuable thing you will produce this quarter, and it is produced by asking rather than by working harder.

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THE CONVERSATION, SCRIPTED

When you bring the early-payment finding to your manager, bring it in this order and it will be heard.

"I have found one supplier carrying £328,767 of our working capital at a funding cost around 9.0 percent. If we paid them at ten days for a 0.9 percent discount, they release £273,973 and are £6,658 a year better off, we are £2,932 better off, and the discount annualises at 6.57 percent, which sits between their cost of funds and ours. Across the cohort the gross spread is 3.50 points and about 2.405 net of running the thing. I would like the verified margin effect to count toward the pool, measured as a stock, and I would like the definition fixed for the scheme term."

Nine sentences. Every figure computable by the person you are speaking to. Nothing in it asks for goodwill.

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APPRECIATIVE QUESTIONS FOR YOUR TEAM

1. When has a change one of us suggested shown up in a number somebody senior quoted back to us? What made that one land?
2. Which of our suppliers would tell us honestly what our payment terms cost them — and what would it take to earn that conversation?
3. What do we already know about where our money goes that nobody has ever asked us for?
4. If the scheme's measure were written the way we would write it, what would the first line say?