Success in any business is pretty simple: Make more money than you spend.
Simple, sure, but not easy.
In order to make this definition of success more manageable, many in leadership positions break this down into two parts.
(This is where they usually make their first mistake.)
They break this into two actionable steps:
- Make more money.
- Spend less money.
“Make more money” sounds like a sales problem, and there are 100 excuses as to why this action item is out of their control. Customers aren’t buying. The market is bad. Competition is too great. And so on.
“Spend less money” sounds a lot easier. If there are 100 reasons that making more money is impossible, there are another 100 reasons why spending less money is the only sensible thing to do if we want to take more money home at the end of the day, right?
Look around. People all have a little extra capacity, and if we could figure out a way to only pay for the time that they’re actively producing product, we could “eliminate the waste” inherent in excess capacity. In fact, if we outsource all of the overhead admin work that doesn’t have a revenue stream attached to it, we could achieve perfect productive efficiencies all while saving money!
Sounds good, doesn’t it?
It’s too bad that you can’t actually break that simple definition of success into two equally actionable parts.
Wait, what? These two steps are so engrained in our business brains, that it’s sometimes difficult to see that they don’t logically contribute to success individually.
Don’t believe it? Let’s look at them again.
“Make more money” does not lead to success by itself even if there’s no competition, the market isn’t bad, and customers are buying. It doesn’t matter if you go from making $10 to making $15, if it still costs you $20 to generate that revenue.
“Spend less money” doesn’t lead to success by itself because the short-term extra you take home eventually erodes your ability to sell and grow. You will never save your way to new revenue. Eventually, your company will starve and die.
The good news is that the simple definition is one, completely linked and actionable step in and of itself. Make more money than you spend.
Every component of your business needs to be strategically linked to the goals of the business which, in turn, should be strategically linked to delivering value to your customers. If this link is clear, and your management and team members are aligned, your company and team will be primed to do these three things before resorting to cutting costs:
- Look at rates, not totals.
Take a look at the rate at which money is flowing out of your company compared to the rate at which money is flowing into your company.
Instead of aimless cutting for a short-term windfall, look for ways you can slow the rate that money is flowing out of your coffers.
In the long-term, managing the difference between these two rates—ensuring that money is flowing in more than it’s flowing out—will allow your company to profit without eroding your ability to grow.
- Identify the choke points.
As you’re looking at the rate money is flowing into your business, identify any choke points limiting the money flowing into your business. This might be the sales pipeline, this might be one particular department, process, or task within operations, and it might be a combination of both.
Identifying these choke points is critical because these are ultimately constraining your ability to keep money coming in faster than it’s going out.
These choke points are where you should focus your continuous improvement efforts.
- Focus on value.
Evaluate and understand the value you ultimately provide to your customers. There’s no getting away from the “make money” requirement in our definition.
Making that money relies on your company delivering the value that your customer expects.
It’s easy to think that customers only care about price, and it’s all too easy to forget that they have businesses to run, too.
Would it be valuable to your business if one of your vendors could open up one of the choke points you identified in #2? How can choosing your company help your customers with their own choke points and the flow of money through their business?
Simple, but not easy.
Yes, the cost-cutting step from the common wisdom can yield short-term wins for you and your shareholder, but that comes at the expense of long-term viability. If cost-cutting is linked to management bonuses, watch out. If you’re an owner, rethink this metric. If you’re a manager, get your bonus and get out, it’s only a matter of time before there’s not enough coming in to justify that which goes out to you.
Skip the common wisdom and go with common sense instead. Make more money than you spend.