How to Find Operational Leverage: Step 2 of Your Business Tune-Up Program

Sorry to have kept you waiting for part 2 in my 4-part Business Tune-Up Program. This week I want you to find out what really drives the profit numbers in your business. Scrappy entrepreneurs often build very broad-based businesses — which can become a confusing mix of high-profit and no-profit products or services. Let’s uncover which is which and begin to fine-tune things like pricing, product offering and profitability.

In last week’s lesson we left off with your new “Dashboard“.  If you’ve made a great dashboard then you already know all the steps that your cash goes through before landing in your bank account.  You’ve drawn a “Cash Timeline” and you’re starting to understand your own cash flow, or “cash cycle”. (Want to catch up?  Here’s last week’s lesson on listening to your company.)

So far though, we’ve only looked at financial results.  We wanted to get a snapshot of where you are.

Now it’s time to translate the financial into the operational.  Ready?

Business Makeover Week 2:  Measure Performance & Identify Key Drivers of Profit

There’s just 3 simple steps this week.  Each one should take you 20 to 60 minutes.  I promise it will be time well invested.

1. You know your financial numbers, now look for what’s driving them.  Start by identifying any bottlenecks in your cash timeline and think about the business process behind those steps.  Where does the money slow down or choke off?  For example, does your paper dashboard show that you have a lot of customer stuck in the “contract writing” cycle?  Maybe your key operational problem is getting contracts signed.  Or do you have a lot of customers waiting on delivery?  Maybe you have a bottleneck in inventory control.
2. Add measurements to your dashboard that will help you improve the underlying operations.  Measure the number of days it takes you to sign a contract, or the total value of your inventory.  Remember, when you record these things on a dashboard, you’ll be able to see how the numbers change over time.  Compare your results to both where you’ve been and where you want to go.  Strive to make a bit of progress each week.
3. Finally, drill down on each product or service.  How much does it really cost you to deliver each one?  Which ones are most profitable (and which are costing you more than you thought?).  If you can’t raise prices enough to make them all equally profitable, shape the business to emphasize the most profitable and get rid of those that are “just ok”.  Don’t forget to track the time, materials, rent, utilities, and other items that go into each service.  Ask your CFO to help you allocate overhead expenses to each product line.  I guarantee you’ll find some surprises.  Nine times out of 10, your “gut feel” will be transformed by the actual numbers.

Stay tuned…  I’ll send another installment approximately each week.

Want a sneek preview?  Here’s the titles of what you’ll be hearing from me over the next 3 weeks.

• Week 1:  Listen to What your Business is Telling You
• Week 2:  Measure Performance & Identify Key Drivers of Profit (above)
• Week 3:  Build a Stronger Financial Foundation for Growth
• Week 4:  Grow Faster with the Right Strategy

photo credit: Martin Whitmore via photo pin cc