Help!
My business isn’t behaving properly.
Do you ever get the impression that things aren’t quite right but you can’t put your finger on what it is? All you know is that you aren’t making the headway you feel you should.
Sure, sales are down in some areas, but generally it seems reasonably normal. I’ve been working with a business recently where they sell products in a variety of categories and record Cost of Sales per category and GP by category. But, what they haven’t done is apportion OPEX across the categories to give a clear picture of what their EBIT line looks like.
Doing this simple process identified for me that only one of the categories was generating real profit. Although this knowledge doesn’t fix anything, it provides very valuable insight into how to change the business to become more profitable.
I am not an accountant, but I do have a feeling for how to use financial reporting to identify truths and with truths comes options for how to respond. Although it is a tired old saw, “you can only manage what you can measure” is so true.
The next step in transformation of this business will be to look at productivity in the team. I have no idea so far what this will reveal, but what I do know is that when budgets are set for this business in future, they will be at category level and at sales per head count. It is less important to ensure everyone is equally dollar productive, because some people do non-sales roles, but there is a very simple equation that says to make X revenue we need Y people but to achieve Z profit, Y needs to be kept at a cost no greater than V.
The most important part of all this is to have good data available. The P&L is data. What you do with it turns it into information that can drive action and change.
In the instance of this business, there is no accountability for producing results except in the minds of the owners. The team have no budgets and are not exposed to the financial results so they feel no connection to the success or failure of the business.
So, when the budget is struck, it will be shared with the team, right down to the EBIT line and they will be taught how to understand what it says. They will also be assigned sales budgets in their various departments which will become part of how the owners will manage their performance and more importantly, how the individual team members get to own the outcomes and their achievement.
The goal in this business involves a significant growth in revenue, including in new categories and an even bigger growth in EBIT results. It is unlikely that much saving can be achieved through COGS, but there are undoubtedly savings to be found in OPEX.
The secret sauce here will be in generating much higher sales per team member and this will come in one of three ways. First and most agreeable is that the existing team “sign on” to what the company is out to achieve and fully engage their considerable expertise in producing the results. Second is that they accept that they are lacking in the full range of skills but are motivated and they can be trained and coached into performance. The third way is the least preferred but sometimes the most transformational. Existing team members recognise that they no longer have the drive, the passion, the energy or the commitment to be part of the new environment of accountability and being results driven and they will quickly de-select themselves.
The fear here is often these people know a lot about their category and any owner is very reluctant to let them go. But, it is here that transformation is most often seen. Deadwood cleared and others either step up with enthusiasm or new people are recruited who arrive knowing what is expected of them.
The icing on the cake here is that the team will be further drawn into the goals of the business by being incentivised to do so. Not a sales commission because that targets the people who directly interact with the customer and ignore the efforts of the people in behind who make the processes work and ensure the customer gets what they want when they want it.
This is a team based incentive that is shared by the whole team and is based on growth of revenue and EBIT over the previous year’s results. It makes everyone responsible for everyone else and promotes people self managing and ensuring that colleagues are doing their part to achieve the goals.