If your business grew by 5% last year, should this year’s goal be 6%? If your segment of an industry has been shrinking by 8% each of the last 3 years, should you scrap your growth goals and only focus on cost cutting? Or are a series of sub goals related to increased productivity, product improvements, and targeted marketing campaigns behind your growth goal?
Our best results have been achieved when clients have embraced transformative goals.
It is much more rewarding to intentionally create a company that is designed to be profitable than arbitrarily incrementally reactively grow into an awkward less profitable size.
When you truly know what drives the profitability of your business, you know to look for more of that. For example, operational excellence can drive profitability. One service oriented business may have operational excellence when it has a 1/2/6 ratio of account executives/project managers/ associates. That company’s growth goals could be based on maintaining that ratio. The question becomes how do we create a company that attracts gross revenue that fuels 6 account executives, 12 project managers and 36 associates? Operational excellence for a distributor might be realized through a 1/6 ratio of hubs to branches or always hitting a specific return on total assets (ROTA).
One of the many responsibilities of an accounting department is to track key ratios. The best CFOs know how to identify and recommend a few critical key ratios that are closely related to what drives profitability for the specific company. And their choice go much deeper than simple gross profit.
The attributes of the sales people can simultaneously be the optimizing and limiting factor when profitability is driven by consultative selling. The sales department may track average order size, closing rate, gross profit, orders per month, orders per sales professional, etc. They may even track the time from lead to close (buying cycle). I’ve seen powerful transformative growth goals result when the VP Sales and CFO confer and create combined ratios (magic number) like Average Order Size X Closing Rate/Length of Buying Cycle. Maybe the optimum Order X Rate/Cycle value is achieved through a specific combination of experienced and new sales people. Maybe the value of their “magic number” goes up when each sales professional has a book of 50 targets instead of 200.
Do you really know the most critical numbers behind what drives your profitability? Could you generate a transformative goal based on a “magic number” created only for your business?
Maybe your company is within a segment that provides innovation and leading edge products so you can use premium pricing. But far more companies function around mature products and aren’t viewed as “cutting edge”. Their (maybe your?) pricing is under pressure every day.
Two businesses that contacted us recently each need to generate a minimum of 33% gross profit on their projects to cover reasonable operating expenses and produce a modest net profit. But they each keep finding themselves responding to corporate bids that provide a skinny 5-7% gross profit. That’s if everything goes well! If they win the bids, they’ll end up with a net loss of 25 – 27%. In other words, every time they go after those bids, they are unknowingly volunteering to donate huge sums of money to corporate clients.
How can bright executives of midsized companies do that? Gross profit blindness happens when folks are in survival mode for too long. These two companies are both involved with commercial facilities. The recession of 2008 impacted the commercial facility industry hard. That recession was the implosion of the financial and real estate markets. So, yes, in many ways, the cannibalization of the facility management industry is a lagging side effect of the recession of 6 years ago!
Lingering high unemployment within an industry can also fuel gross profit blindness. Purchasing agents and operations managers have increasingly taken vendors for granted. When abusive behavior becomes “the norm,” vendors can actually develop a “victim” mentality. It is a powerful downward spiral. A vendor that has tolerated verbal abuse and below reasonable pricing can also lose objectivity about the value of their products and services. When customers yell, the vendor can have a knee jerk reaction and quickly accept the blame. Increased “write offs” make low gross profit contracts even worse. Every time the vendor does that, the customer is rewarded for negative behavior…so, like a spoiled child who gets what he/she wants when he/she has a temper tantrum, the abusive behavior escalates.
We have recommended different approaches to each of these businesses. No two situations are exactly the same. In one case, we recommended that the executives start targeting their marketing and sales to a completely different industry. We suggested that they do some field trips/site visits to see how people in other industries treat one another. They have tolerated so much blame, last minute changes, screamed demands, and unreasonable pricing they have lost perspective and think everyone is awful everywhere.
The other company has connections with trade association leaders who want to spearhead an initiative addressing culture, behavior, values, ethics, shared responsibility, fairness, etc.
What would you tell a woman who lives in an abusive marriage to do? She has lost her self-esteem. She has come to believe that she doesn’t deserve any better. She has lost objectivity about her skills, abilities, and value. Business owners who become beaten down and think/act like victims also need to go elsewhere to recover!