July 15, 2020 - Ever wondered what expert Company Directors see in the financial statements that others can’t?
How do they use a report full of numbers to dissect the performance of a business?
They start with a quick look at the ‘result’, i.e. the Profit/(loss) then turn to the balance sheet to assure themselves the business isn’t going broke.
Expert Directors then methodically work their way down a set of Financial Statements starting from the top. They divide the Accounts into 3 main sections and them use them as a guide as a guide to engage in a strategic discussion.
The easiest way to picture this simple, structured methodology, ( I’ve written a book about it called ‘3-Levers’) , is using an analogy of controlling a ‘business machine’ with 3-Levers (pictured). If you pull on one lever, you need to understand how it can effect the others, within the overall context of the strategy.
The 3 levers are :
- Direct Costs
Financial Statements provide feedback on how the strategy is unfolding. They want to find out is things are going to plan and assure themselves that management are doing as good as is possible. They are methodical and structured, because they need to understand the whole story and can’t risk missing something critical.
Managements’ job is to work the 3 levers to create maximum value for shareholders, in the same way a machine operator works the levers, to do the job in the best and most efficient way.
Leaders of today need to be capable of instinctively working all 3 levers, whilst looking out the windshield at the most dynamic business landscape in the last century, answering phone calls, responding to emails, while trying to stay ahead of the competition and keep the shareholders happy – all at the same time.
Pulling the Sales lever to increase revenue, involves selling more at the same price or selling the same volume at a a higher price. Making that happens requires implementation of a strategic plan.
Direct costs are impacted from any changes in production volumes and input costs. These costs may be fixed or variable in nature. Procurement initiatives and a focus on efficiency can lead to lower costs.
Overheads are costs of running the business that performs the technical work, like premises, management and administration. These need to be functional, rational and justified relative to the strategy.
Directors will scrutinise costs, looking for comfort that there is no inefficiency, waste or excess.
But an increase in revenue or a decrease in costs may not necessarily result in an increase in profit.
Ask 30 experts for the best way to improve profit margin and you’ll get 30 different answers.
This is because there is no single best way to increase profit margins. No magic wand, no panacea.
One thing is certain though, is that if you align all the people in a team with a common goal the collective output is more than the sum of the parts. This is what Aristotle observed in 300BC. We see it also in nature, like a flock of birds flying in a V-formation.
As businesses strive for competitive advantage (via quality, innovation, customer responsiveness and efficiency) don’t underestimate the contribution front line people can make. Years of experience and observations can be tapped into if you know how. Most front line people have the capacity to learn the fundamentals of profit, but simply have never had an opportunity in the past.
3-Levers, The Essential Guide for increasing Profit$, is a written with front line people in mind. It’s easy to follow narrative takes a strategic view to profit, breaking down the main drivers or levers, i.e. sales, direct costs and overheads. Once front line people understand, it opens an untapped communication channel and you’ll be in a much better position to leverage their expertise.
3 Levers presentation is a great way to ‘prime’ the management team before a planning session. It makes aligning the organisation with a common goal of increasing profit much easier when the front line understands the bottom line.
Free e-Book : If you are interested in obtaining a free copy of my e-book 3-Levers, Essential Guide to Increasing Profit$, please click the link below.
I hope you enjoy reading and get something useful out of it that you can put into practice.