When we think of business performance consulting or business financial consulting, we may think of these services as appropriate for struggling or underperforming businesses. In our years of consulting, that is not the typical situation. While we work with some businesses facing temporary challenges, we most often provide services to high performing companies which are striving to reach the next level. The business owner may feel that despite good performance, if some adjustments were made to the business strategy then the business could grow or become more profitable. Maybe after years of solid performance the business has plateaued and the owners would like some fresh ideas. Other owners set new goals to expand, and they aren’t exactly sure how they will achieve them. We are perhaps most often contacted by an owner when, despite solid overall performance, one or more of the business units or products and services may be lagging behind. There’s a good chance that the business owner or manager has successfully resolved one issue only to realize that something else is still not optimal. That’s when they reach out to us.
Finding the ultimate solution requires a new approach, one that is systematic and able to distinguish the complex interrelationships of disparate data points. In fact, it’s because these issues are so complex and interrelated that it’s often difficult for the business owner(s) to distance themselves enough from the business to objectively see the root cause of the issue that is impacting performance.
Over the last few months, we have reviewed benchmarks for Pre-tax Net Income, Gross Margin and Operating Expenses. This month we’ll take a step back and provide some examples of our process to help businesses focus on those items that have the greatest impact.
First Step – Fact Gathering:
- Start with an open mind. It’s important to start with the mindset of being open to hearing new ideas and approaches to managing your business. Although it can be difficult to change the way things have always been done, it is important to be able to recognize that there could be a better strategy to achieve the overall goal of superior performance.
- Employee / customer discussions: We like to have discussions with employees and customers because often times they will uncover valuable information that could help the business grow. During this process it is important for the owner to maintain an open mind. It’s possible that during these interviews an employee or customer will make a comment that might not be what the owner wants or expects to hear. However, we use this information to formulate a strategy for success. Simply discrediting this information as false could negatively impact the business. For this reason, we encourage business owners to allow their teams to continue to share their views. For example, if an employee reports that he/ she is not following a company policy, rather than criticize the employee, we suggest that management seek to understand why. In our experience, most employees want to follow company policy but don’t when they find something inconsistent or they feel the policy simply doesn’t produce the desired result. Knowing the employee’s point of view can lead to an invaluable insight.
- Review any previous studies: Were previous recommendations fully implemented? Are there any other insights in the report which might make a difference for the business now?
- Review financial results: Review both the high level and details of results.
- Look for any numbers that don’t make sense. That is, numbers other than you might reasonably expect.
- Look for changes period over period in both absolute terms and percentage change.
- Understand the impact operating results are having on cash balances. That is both the sources of cash and uses of cash. Remember depreciation and capital investments impact cash balances. (Feel free to call us if you need additional help with this question).
Second Step – Analyze:
- Analyze financial results in new ways: Look to organize the data in new ways. For example:
- Sort expenses largest to smallest
- Confirm the groupings of revenue and expenses make sense
- Seek to understand customer profitability
- Seek to understand product profitability
- Seek to understand other aspects of the business
- Understand fixed, variable and semi-variable expenses; and don’t forget to consider the relevant range of a fixed expense. Likewise direct vs. indirect expenses may be relevant.
- We had a client who considered occupancy expenses as fixed, which it typically would be in the short term. But in making longer term decision they did not include occupancy as a variable. Then they decided to double the size of their sales team and needed a new, larger location. The result was lower profit than budgeted / anticipated.
- Develop a root cause analysis: Consider how items fit together. Which outcome is likely the cause of another item? For example revenue is influenced by:
- Number of customers
- Number of products sold
- Price per unit
- Selling expense / new customer acquisition expense
- Customer cross sell rate
Remember even this level of detail can likely be broken down further.
- Number of customers is likely a product of, among others:
- Sales team, sales approach
- Product demand
- Product pricing
- Market conditions
- Product pricing
- Competitor pricing
- Business costs
- Desired profit margin
- Pricing elasticity etc.
Overall, we seek to understand what’s driving the outcome. The goal is to get beyond the simple answer to the source.
Third Step – Assimilate and Gain Insights:
- If you’ve done a good job gathering the facts and staying objective, most likely by this point in the project you’ll begin to see how one data point connects with another data point which might have looked unrelated when you started the project.
- Likewise you’ll begin to see what needs to be done to resolve the underlying challenge. Here are some samples of solutions which might develop:
- We need to hire more sales people because sales are low and in our experience there is a positive return on investment when we hire sales people.
- We need to adjust our marketing message because customers are not seeing the value, etc.
As you work through this analysis feel free to give us a call. We’d be glad to answer questions or help you through the process.