I see many business owners and managers who study their financial statements, chart KPIs, track trends and chase a percentage point here and there. I’ve been told one can’t have too much data. Really? Is this really that hard? I don’t think it needs to be.
I prefer a simpler approach. I like one, or maybe a few, simple guidelines or rules. No more than three. And I observe that the best business people have an intuitive feel for business and live by a few simple rules.
For example, I know a business owner who just keeps their payroll—direct and indirect—to less than half of revenues. He knows he will be okay if he does this. Professional service businesses can usually do okay if they charge out their direct labor staff at 3X gross pay and keep their labor efficiency reasonably good (over 80%). Construction contractors usually need to do at least 20% gross margin to have a feasible business. These are simple rules.
I’m not advocating a lack of attention to detail; far from it. I am advocating keeping things simple and maintaining a firm view on the big picture. All too often people get caught up in incrementalism. You know, trying to improve some metric by 2% while missing the fact that sales could increased by 20% by broadening the product offerings or diversifying the customer base.
In business school they always have examples of this. The one that sticks with me is Federal Express. After trying to measure and motivate people on dozens of metrics, they changed to a focus on one thing: on-time delivery. Everybody understood that, everybody knew how to contribute to the goal and profitability took care of itself.
I think this is even truer in small businesses. Give staff no more than three objectives and make those the focus. Everybody can remember three things. Three objectives can be kept top-of-mind by everyone.
I think I’ve seen dozens of times when overhead is too high. The focus invariably turns to reducing office supplies and cell phone costs. Why? Because these things are always higher than it seems they should be. Who cares! The cost of people is the biggest cost by far for most businesses. But it is easier to try to shave costs off office supplies and cell phone bills rather than have “the talk” with the employees who aren’t contributing. It’s the corporate form of denial.
My advice is this: Look at the big picture. Concentrate on a few key drivers of profitability in your business. Keep it simple. Engage everyone in achieving the goals. Make money and have fun.
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