We’ve often reflected on what the important numbers for a business are – and why so many seem to be looking at the wrong stuff.
Any good business is a well-oiled machine turning demand into profit into reserves – that bit is not hard to understand, so why is it so many businesses don’t make, or even monitor, meaningful profit. Instead they seem to focus on turnover, or worse still turnover growth?
Profit is not just one number, it’s a neat set of metrics that accurately measure many aspects of business:
- Net Profit: The bottom-line, the real contribution to a company’s balance sheet comes from this hard number. Regardless of turnover, gross profit, number of employees, countries operated in, number of clients etc. If this number is below par then it will be eating into the balance sheet reserves.
- Gross Profit: A measure of the balance between client pricing versus operational cost. Unless the business is in investment, this will always be a higher number than net profit – that is really to say that a business’ net profit will always be less than the gross profit. A poor gross profit cannot easily be reversed into a strong net profit.
- Balance sheet: Most businesses need assets (stuff) to ply their trade and also some reserves of working capital. This is what the balance sheet represents; the amalgamation of asset value and spare cash. A business with a poor balance sheet is generally living desperately on the edge of extinction.
Ok, so we’re at the “basics” level now, but how many other numbers are companies getting wrong?
- Number of employees: Is more really better than less? Surely fewer folks doing the work of many is a better gauge of quality? Besides, most folks are happiest in smaller organisations so will produce better work, higher quality, fewer errors, and greater engagement.
- Customer portfolio: Too many customers is not a good thing, you can’t provide a great service, product, or experience if you’re torn this way and that. A smaller client base will feel more cared for, more loved, and receive a far better experience overall.
It doesn’t stop here, companies can get obsessed about having “more” as it massages the “bigger is better” belief that most CEOs have. Sadly, it’s an ego-centric approach that can kill a business. More products, more departments, more meetings, more Facebook likes, more stuff, more of more, more junk, more madness, more lies, and more bankruptcies!
Less is more
Some business gurus expouse the “expand or die” mantra, citing competitive advantage and economies of scale as the benefits. I wonder how the giants of business feel today about that? Many have been toppled purely due to their scale being too large and unwieldy to adapt – leaving more nimbler and agile companies to come along and disrupt the status quo.
There are now very few traditional economies of scale left – it’s true that many do exist around big data, market reach and functional design in highly disruptive markets, but mostly just having more staff, more offices and more products/customers is a poor recipe for sustainable success planning.
But let’s not think small. Less is not a “small” answer, less-is-more is the core understanding that a tightly managed organisation, with closely controlled finances, a discerning sales strategy, tightly-knit customer service, measured scale, and a very firm hand on rudder is the recipe for long-term success.
Or you could just aim for more Twitter followers!