7 LEVERS FOR HIGHER PROFITABILITY

Let’s talk about CASH and profits….

Sometimes we think our business finances are linear… if we raise revenues 1% or cut expenses 1% then this will impact our profit 1%.

However, they are not linear.

Did you know that a 1% price increase could increase your profit 3x as much as selling 1% more at the same price?

As part of the “Cash Flow Story” report that we use with customers, you can find out what the “Power of One” will do for your business.

Essentially, the “Power of One” calculates the impact after changes that increase the following items just 1%:

  1. Price
  2. Volume
  3. Cost of Goods Sold (Reduce)
  4. Accounts Receivable (Reduce)
  5. Accounts Payable
  6. Inventory (Turns)
  7. Overhead Expense (Reduce)

For the sample company “Rebecca’s Coffee” with $6.6 million in revenue, a 1% improvement in those 7 items resulted in a 20% increase in profit…

and cash flow increases from a negative $193,000 (need to borrow) to almost positive cash flow (just reducing AR two more days balances cash flow at zero). 

Even though Rebecca’s has $6.6 million in revenue, the current growth from $3.4 million four years ago burned cash and increased debt.

The business is only valued at $207,000– less than 4% of sales!

After the 1% improvement in those 7 elements in the Power of One, the business how has a value of $865,000– a four-fold increase. (Based on a standard multiplier of 4x profits).

You can see the whole sample report here: (Link to Rebecca’s Coffee Cash Flow Story sample report here).
www.cashflowstory.com/dl/rebeccas-coffee-2018.pdf

Fascinating, right?

Of course, with a few strategic changes you can influence the Power of One factors much more than 1%. 

For example, after a change in how the contact center handled incoming sales inquiries, one of my clients saw a 37% increase in volume the next month.

Another client changed their scheduling and simplified their production process to handle 40% more volume with the same staff and reduced their cost of materials, so their cost of goods shrunk 10% on the higher sales. They went from zero profits to a decent 10%.

So what is the potential in your business?

If you are curious what is possible to increase your cash flow and profits, just contact me and I would be happy to provide you a custom Cash Flow Story report.

[strategy] Are you stuck in Stage 2 of business growth?

Many companies flat-line after a growth spurt, as the organization, faces new issues to handle the increased customers and orders and complexity.

To explain why this happens, I have included part of an article that appeared on the Growth Institute Blog– “4 Stages of Growth.”

Most businesses stay at Stage 1 or get stuck at Stage 2– less than 10% make the leap into Stage 3 [where the owner has sustainable financial value and freedom].

This is a good outline to see where you should focus your attention and invest your time and money:

4 Stages of Growth, by Daniel Marcos [Growth Institute Blog]

The four stages are a roadmap that guides how your focus, priorities, and key decisions will change as your company grows. The roadmap will prepare you for the barriers you will face and the new skills you need to develop to overcome them.

Here is an overview of the four stages of scaling up:

  • Startup: 1-5 employees
  • Grow up: 6-15 employees
  • Scale-up: 16-250 employees
  • Dominate your industry: 250+ employees

The Dynamic Growth Model

For a company to scale to $5, 10, or even 100 million in revenue, you need to understand what to expect at the four stages of scaling up, and how to shift gears from one stage to the next.

Shifting through these four stages is what we call the dynamic growth model. Let’s now look into each stage of the dynamic growth model so you understand the priorities and barriers of each stage, plus the key decisions you need to make to go to the next stage. [To read about all the stages see the full blog here].

Stage 2: Grow up:

At this stage, you have grown to 6-15 employees. You have fixed expenses such as salaries and rent. This is a discovery stage where an entrepreneur ages the most. It’s the most painful stage because you begin to face a lot of cash flow problems and leadership problems.

Focus: 100% of sales.

Priority: Hire the right team.

In Stage 1, you don’t really choose your employees because you are not able to offer an attractive salary or attract people with a good brand. So at Stage 2, your employees actually choose you.

By the time you reach Stage 2, you need to switch gears. Now, you are choosing your employees. You have to be more selective of who you hire, and have clarity of their role.

Barrier: Leadership.

In Stage 1, the entrepreneur wears multiple hats — from administration to technical work, accounting and more. At Stage 2, you have to become a leader.

Ability: Delegate, predict, repetitiveness

As a leader, you now need to know how to delegate, set up systems and procedures, and leading your team to help you grow the company.

Decisions: Cash and team.

As mentioned earlier, this is the stage you begin to face cash flow procedures now that you have fixed expenses. Thus, your key decisions will revolve around managing cash flow and hiring the right people who can grow your business.

Note how Daniel points “it’s the most painful stage” and yet so many businesses get stuck here– causing that hamster-wheel feeling for owners who are frustrated that growth hasn’t led to a better team, a well-oiled machine, higher profits or less stress and time off.

You can stay at Stage 2 with a smaller team, but evolve to a professionally run and super-profitable business– it’s all about the focus and decisions [people + process].

PEOPLE summary from the book Scaling Up

When we say “People”– there are three levels that are all important to get right as you build your team of A-Players:

For each of the 3 levels, there are three elements to “get right” as part of an aligned team for growth.

1. LEADERS- define clear accountability for every role

  • One Page Personal Plan– Each leader should examine the 4 key areas of life/work to ensure their personal goals are being met
  • Functional Accountability Chart [FACE] – This tool helps you map the key functional areas of your business, to make sure that everyone has a person accountable for results
  • Process Accountability Chart [PACE]- This tool maps your core processes in your business, again clarifying who is accountable and how the function should be measured for success.

​​​​​​​2. MANAGERS- Retain and super-charge A-Players with good managers

  • Keeping People Engages– Play to their strengths, remove obstacles to performance, align individual work to company goals, recognize and reward them for great performance 
  • Develop people from Day 1 – create a first 90-day onboarding plan, create training plans and show managers how to develop their team and transfer skills

​​​​​​​3. TEAM- Hire A-Players at all levels

  • Clarify Roles: Define the job purpose, outcomes, competencies. I like to call these roles- Responsibilities- Results. 
  • Blend specialists into a complementary team and cross-train as much as possible.
  • Attract the Right People who fit the job AND your culture/ core values.
  • Update your selection system with a more systematic process to evaluate Job Fit and Culture Fit, attract A-Players with opportunities to grow and make an impact

I hope this helps you visualize how you can get all three levels of your team- leaders, managers, and staff aligned and rowing in the same direction.

Next step- develop your “human” resources by:

1. Get the Right Managers—to engage with these 5 critical activities:

To retain A-Players, you need great managers. 

• Help people play to their strengths, i.e. do what energizes them.
• Remove obstacles that hinder performance.
• Set clear expectations and help people see how their work links to the company goals/priorities.
• Recognize and appreciate people.
• Don’t hire many average employees. Hire the best, pay them above-market rates and invest in developing them.

2. Develop people. 

  • Invest at least 2-3% of your payroll on training. 
  • Use onboarding to inculcate your new staff into your company culture, expose them to the organization’s key work areas and connect them with other colleagues. 
  • Leverage modern learning platforms and start weekly coaching conversations to focus, train and develop your people.

I have seen the “best places to work” do all of the above, and those that don’t commit to getting the right managers and developing people [by great managers] continue to struggle with attracting, retaining and motivating their staff. 

[PEOPLE] Are you dragging your team along as you grow?

 “The only way to grow a company is to grow the people first.” Verne Harnish, in his book Scaling Up.

As I told you in my last article, People are essential to your company’s growth and success.

But… do you have the Right People doing the Right Things, with clear accountability and metrics?

Sometimes your team that was great last year just can’t keep up with the growth in your business today. 

As you grow, you need everyone to step up, learn and do more, and work together on the right things.

You need your team leaders and managers to become awesome trainers, coaches, and cheerleaders for their people and for the company’s goals.

Sometimes the opposite happens— your key people become frustrated with the added responsibilities or avoid them altogether getting stuck in the day-to-day. 

Or they start having “communication” or staff issues that just get worse.

When you think about the Right People, there are 3 levels that you need to get right as part of an aligned team for growth.

[strategy] Your Strategy: Find & Keep Ideal Customers

You may have heard this quote: “The purpose of a business is to create and keep a customer” -Peter Drucker

One of the best presentations I attended at the Scaling Up Summit in October was by Christo Popov, a coach for fast-growing businesses in Europe.

He started with that quote, and simplified strategy down to three crucial elements – 

  1. ​​​​​​​​​​​​​​What is “the market” for your goods and services? 
  2. ​​​​​​​​​​​​​​Who is your ideal customer?
  3. ​​​​​​​What do customers need?

​​​​​​​-> and then figure out your most profitable offering: “What almost no companies offer but [most] or some clients care about.” [credited to Kevin Daum of the Awesome Experience.]

​​​​​​​Sounds so SIMPLE right?

​​​​​​​Yet according to statistics Christo shared:

  • ​​​​​​​75% of businesses have not clearly defined their capabilities
  • ​​​​​​​90% admit to missing opportunities
  • ​​​​​​​80% of employees don’t understand their strategy
  • ​​​​​​​8% of those with a clearly defined strategy actually execute it well!

​​​​​​​The moral of the story is that this lack of strategic focus and execution planning by your competitors is leaving a potentially underserved client-base for you. 

​​​​​​​This is the concept of a “niche” business.

​​​​​​​When you offer something your competitors do not and your customers want it… you have more pricing power and higher revenues and profits. 

​​​​​​​This is far preferable to being a tiny fish in a big ocean of companies with a commodity competing on price. Based on economic theory, they beat each other up on price until it’s “perfect competition” – meaning very small profits. That’s not the ideal business to be in.

[Strategy] 7 “Strata” of Strategic Thinking

When people talk about having a strategy, they often consider this just one thing. 

While it’s important to have a clear and focused one-phase strategy,
there are actually 7 “Strata” [layers] of strategic thinking, from the Scaling Up process:

1. Mindshare — what words do you own in the minds of customers and prospects? 

2. Brand Promise— who is your core customer, what needs are you providing for them, three brand promises that are compelling reasons to buy from you, and metrics to know if you are delivering on those promises.

3.  Brand Promise guarantee— what you offer to your customers if you break your promise

4. One-phrase strategy— the key competitive “lever” that drives profits, serves your core customer and repels other prospects and competitors [example IKEA is flat-pack furniture]

5. Differentiating activities-– what your business does to execute your one-phrase strategy and is hard for your competitors to copy

6. X-factor— your hidden advantage that allows you to deliver 10-100 times the value compared to your competitors, often expressed as Profit per X [an example is Southwest airlines focus on profit per plane, not per passenger or mile]

7. BHAG [credited to Jim Collins]– your Big Hairy Audacious Goal– your 25-year goal that is aligned with your Purpose and often expressed by X-factor

All of these 7 Strata are designed to be aligned with your Purpose and Core Values and clearly communicated to your whole team on a One-Page Strategic Plan.

When you have clarity and focus on these 7 key elements, they are an amazing filter to make decisions and focus your priorities and efforts.

If you would like more explanation and examples, email me and I will send you an executive summary of Scaling Up by Verne Harnish.