90-Day Sprint – Identify Opportunities for Improvement
Step 5: Identify Opportunities for Improvement (Weeks 9-10)
Now you have your financial statements analyzed, with your projections and tools in place, but you start to notice new things happening that warrant further investigation. As a CEO, you often do not make changes, either personally or professionally, unless you’re forced to. Consequently, one of the things that will happen is you will be faced with crises in your company.
Improving Profitability 1-2% of Sales
What happens when you are driving 70MPH down the freeway and let go of the steering wheel? Think about the organization as a car. We’re driving down the road, 70 miles per hour, and what happens when you take the hands off of the wheel?
Some might say that the car will immediately swerve off of the road, but in actuality, it stays normal for about 500 yards until it veers slightly away from its path.
Same thing applies with a business.
Your company may be running smoothly for a few years, but then outside forces start creeping in. Suddenly, it’s 1% increase in costs here and a 2% increase there, and over the course of 3-4 years, it could be 7-8% increase in costs as a percentage of sales.
Ancient History
The Chinese have observed that out of every crisis, there is both danger and opportunity. In realizing this, your goal is to recognize that although there is danger, you can also seek opportunities from this change of climate.
Three Ways to Respond to a Crisis:
There are three ways to respond to a crisis. When you’re faced with a recession, this gives you opportunity to “weed the garden.” Crisis gives you time to focus on productivity (more for less). When you are faced with a slowdown, you can prepare for the next spurt of growth.
Let’s dig a little deeper into those three responses.
Weeding the Garden
Periodically, you need to go through your organization and, like clearing a closet, you need to clean out your company. As you grow your business, your sales are often preceding your costs. It’s like a wave – when they start peaking out and going down, your costs carry through that wave. There is an inflection point where your costs are higher than your sales and you lose money again.
What you should do when this happens: start realigning your costs much quicker than you usually do.
The Silver Bullet
You have to spend money to make money. Often, however, people fail to look strategically where they are spending their money. Recently, we consulted with a company that was trying to get a new product line. Wo we investigated to see where we could avoid cut overhead in total, and maybe cut overhead in the admin function, reallocating it to marketing in support of this new endeavor. Sometimes you can’t grow a company by cutting expenses, but you can grow it by reallocating expenses.
One of the ways to do this is measuring your productivity, also known as what we like to call “the silver bullet.”
What is productivity?
Productivity is “throughput divided by resource.”
A throughput example would be sales, and the resource would be full-time employees. So for a company, good productivity would be measured as (sales/effort from full-time employees). This is a very powerful tool to improve the productivity without cutting expenses, laying off people, and raising prices.
Preparing for the Next Battle
Finally, when the times are bad, you need to prepare for the next battle. When times are slow, you need to invest in new skills. You often can’t push sales in a recession during a slow time of the year, but you can acquire new skills so that when times pick up, you’re ready. We have numerous tools with tips and tricks on how to build those skills.
Managing your Cash Conversion Cycle
The next thing you need to focus on is managing your cash conversion cycle. You want to keep that number as low as possible. It is a rule of thumb of how much cash is locked in your company.
CCC = DSO+DIO-DPO
It doesn’t matter what the number is. What matters is if the number is going down, and staying down. You want to focus on keeping this number low.
[box] 
Existing Financial Leaders: Keep in mind that your goal is to be the wingman of the CEO. Don’t be a neigh-sayer and just cut costs. Instead, you have to provide the CEO the fuel, which is cash, to grow the company profitably. [/box]