Amid a plethora of theories, concepts and systems designed to improve results, there's only one true metric of business success: profit. The trick is how to make it.
"Far too many business owners dig themselves deeper by either ignoring the problems or running after trendy solutions to solve the problems," says business owner and Chief Financial Officer John Minahan. "Both of those options are expensive and often futile," he says. "Success is a series of simple concepts: Set the building blocks in place, create a model based on the mathematics of profit, and keep your focus." When something gets in the way of those concepts, fix it.
Minahan, author of The Business Mechanic: Nine Simple Ways to Improve Your Business, says that in his 15 years of working with businesses, these are the five most common fix-it situations he has encountered:
1. Management doesn't truly understand its business model.
Most company CEOs rise through the ranks as salespeople, so that's how they are conditioned to respond to every business challenge - more sales. What Minahan tries to do is shift that focus to profits. If he asks a CEO what he would rather have, $2 million in revenue with $200,000 in profit or $1 million in revenue with $200,000 in profit, they all hesitate. They know the right answer is the $1 million, but they are so sales-driven, they really want to answer "$2 million."
The easiest fix for helping CEOs get a better handle on their business is to break their profit and loss (P&L) down to no more than six lines. Minahan says he has seen executives pore over five or six pages of a P&L. Unless someone is the CFO, an executive should never have more than a one-page P&L, he says. Minahan finds that executives are always eager to hand him the five pages to look at and tell them what is wrong, but he refuses. "What they don't realize is that having a five-page P&L is what is wrong." The first fix to any business, he says, is to have the executive team describe the business model in six or fewer P&Lline items.
Minahan always starts with revenue, then profit. To explain his concept in its simplest form, let's say a company wants profit to be 20% of revenue. If revenue is 100 and profit is 20, then expenses must be 80. Minahan then asks the managers he is advising, "What should fully loaded wages and benefits be as a percentage of revenue?" The managers look confused. That is the first step in his convincing the CEO that if profit is a percentage of revenue, then so are expenses.
The next step is to break the business model down into the cost to produce, selling expenses and other costs, and then assign a percentage to each. Only then does Minahan ask for the five pages of the P&L and they will assign each line item into one of the three categories. All CEOs should know their business model and have a P&L that ties to it, Minahan says.
"Increased sales do not always mean increased profits."
2. Roles and responsibilities are undefined.
All employees, including the top executives, should have job descriptions and the authority that comes with them. The two main reasons new companies fail to consider roles and responsibilities and create organization charts are ignorance and fear.
The problem in the case of ignorance is that the entrepreneur is suffering from a lack of vision, Minahan says. Just as a parent might look at a small child and have difficulty envisioning him or her grown up, entrepreneurs are often unable to look ahead and see what the company will need - perhaps not right now, but soon, and for the duration of the corporate life span.
The problem in the case of fear, is much more than a crisis of vision; it is a threat to the company's overall success. An entrepreneur who can't overcome this fear will sink the company. The fear stems from a common entrepreneurial mind-set that says the company founder is at the center of the company's every move. These entrepreneurs see themselves at the core of everything that happens in the business, and they are convinced that no matter what the task it, they know best.
An ignorance-based rejection of the organization chart requires education. Minahan says he will generally try to coach the individual into seeing the future payoff of a more structured company. He offers scenarios of what the company would become if it doubled or tripled its revenue.
The fear-based rejection of the organization chart is a much bigger problem because it suggests that this entrepreneur might be unwilling to take necessary risks. "Starting a business does not always make someone an entrepreneur; a willingness to embrace risk does," Minahan says. One of the first big risks when running a company stems from the need to delegate.
3. Salespeople have no quotas.
"A salesperson without a quota is not a salesperson," Minahan says. When owners fail to assign a sales quota, they lack the key management process for the sales force. How can a company address a salesperson who isn't selling but doesn't have a quota? The manager might say, "Sell more next month, or you are in trouble." But if there is no set benchmark for the individual, how can the company blame him or her for failing to perform? What did the company do to motivate this person to do better?
The salesperson with a quota, even a salesperson who is struggling, can be helped. The manager can say, "You are only at 40% of your quota. What can I do to help you achieve your quota?" Both the manager and the salesperson have a common frame of reference for that conversation. There is also a common goal - the quota.
4. Owners think of themselves as both owners and executives.
Owners own the company. Owners don't run the company. When Minahan goes into the corner office of a company and asks the individual what he or she does, nine times out of 10 he will hear, "I'm the owner." That is the wrong answer, Minahan says. The owner might be who the person is, but it's not what he or she does. What the owner does is his or her job title: the CEO, the CFO, the VP of sales. Even worse, if there is more than one owner, and they all answer to "Owner," they are in big trouble. This generally leads owners to believe that they are all equal and can operate as a democracy. But democratic management is dysfunctional, and the only difference between dysfunction and failure is time, Minahan says. He believes companies should "never have more business partners than you can fit in an elevator."
This problem is more common than it should be, but the fix is both painful and simple, Minahan says: Get all the owners in a room and don't let them leave until each one has a defined role, detailed duties and the authority that comes with them.
5. The business has no idea what a customer is worth.
Before someone spends one penny on advertising, the person needs to be able to answer this question: What is the lifetime value (LTV) of a customer? More specifically, how much profit, over a period of time, will that one new customer generate?
If a company can't answer that, it has two major problems. First, it doesn't know its business well enough to make a profit. To be successful, a company must know how long a customer will buy from it, how many times that customer can be expected to purchase the good or service, the profit that customer will generate with each sale, and how many other new customers that first customer will refer to the company over time. If it's a new business or a new product, the compnay needs to make the most conservative estimates for these variables, but it needs some grounding in what the value of a customer is and will be. To lack knowledge of the LTV is to lack a clear understanding of the math that is runing a company, Minahan says. "If you don't know what one customer is worth, you don't know how much to spend to get that customer."
That lack of understanding leads to the second major problem: If the company doesn't know its LTV, it can't make an intelligent decision regarding ad spending. It might say it wants return on investment, but how will it know whether it's getting a return if it has no idea how much is reasonable to spend?
This fix is easy, but requires lots of sales data. Minahan walks his advisees and readers through the LTV calculation - and lifts the veil from a mystery of advertising.
This report was adapted from article by John Minahan who has 15 years of experience with both public and private companies. Minahan is an adviser to CEOs and executives, a certified public accountant, and a graduate of the University of Georgia’s JM Tull School of Accounting. To find out more about Minahan and the strategies he discusses in his book, visit www.BusinessMechanicBook.com.