Bottom Line Thinking

It’s stim­u­lat­ing to talk about strat­e­gy, the pos­si­bil­i­ty of dom­i­nat­ing a mar­ket, or adding val­ue for your customers.

It’s excit­ing to explore oppor­tu­ni­ties and improve­ments to exist­ing parts of your busi­ness, and very reward­ing to devel­op new pro­grams and inno­va­tions that you believe will enhance the business.

The prob­lem is that most peo­ple eval­u­ate ideas, oppor­tu­ni­ties and strate­gies with­out con­firm­ing and ful­ly under­stand­ing the bot­tom line (net income or EBIT­DA) impact of those decisions.

“The man­ag­er has his eye on the bot­tom line; the leader has his eye on the hori­zon.” — War­ren Ben­nis, Found­ing Chair­man, The Lead­er­ship Insti­tute at USC

In meet­ing after meet­ing, and con­ver­sa­tion after con­ver­sa­tion, I’ve seen many lead­ers excit­ed about ideas they gen­uine­ly believe — in their heart of hearts — are going to be suc­cess­ful, who then see no improve­ment after three, six, or eigh­teen months.

That’s because they didn’t start with bot­tom line thinking.

As sim­ple and obvi­ous as it sounds, most peo­ple aren’t in the habit of doing this. We just can’t make the right deci­sions about the best places to allo­cate our cap­i­tal, and human cap­i­tal, to make our busi­ness­es grow and prosper.

Exam­ple: Min­i­mum Impact

I was in a strate­gic plan­ning meet­ing, recent­ly, set­ting annu­al pri­or­i­ties for a com­pa­ny, and a cou­ple of ideas sound­ed absolute­ly phe­nom­e­nal until I took peo­ple through an exer­cise to cal­cu­late the actu­al impact on the bot­tom line. One of the ideas had a bot­tom line impact of $100,000. That’s not insignif­i­cant, but for a com­pa­ny doing $250M a year in rev­enue, it doesn’t deserve think­ing about it for more than a cou­ple of hours. To make the list of the company’s annu­al pri­or­i­ties, the idea should have an impact of at least $1 to $2M to be even considered.

When you apply this com­mer­cial think­ing to strate­gic ideas and oppor­tu­ni­ties, it pro­vides a bet­ter fil­ter to be able to pri­or­i­tize – and ensures that they have real­ly been thought all the way through. Peo­ple must become con­di­tioned to always think about not what they think is good, but to jus­ti­fy the resources it takes to bring them to life and tru­ly have an impact on the company.

Exam­ple: What’s the true cost?

A con­sul­tant was hired to revamp a company’s orga­ni­za­tion­al struc­ture. While it looked good and made sense, no one had run the math­e­mat­ics, and when they imple­ment­ed the struc­ture, they real­ized they’d added 3% to their SG&A costs. For those of you who aren’t accoun­tants, it means that if the com­pa­ny was mak­ing a 10% prof­it, they’d instant­ly knocked it down to 7% — all because no one had cal­cu­lat­ed the cost of this ​“bril­liant” new structure.

It’s not that you can run per­fect math on every deci­sion – and some deci­sions don’t increase prof­its or decrease costs – some­times they just reduce risks, or impact some­thing intan­gi­ble. The most impor­tant thing is to try and run some real num­bers to under­stand the real impact rather than gen­er­al­ly think­ing this is a good idea.

Exam­ple: Will it increase sales?

You want to imple­ment a new soft­ware sys­tem — like Sales­force — to help man­age leads. Many exec­u­tives get excit­ed about these soft­ware plat­forms (which can have tremen­dous poten­tial) so they spend a lot of mon­ey, over-build and over-com­pli­cate the sys­tem, with­out show­ing how they can increase sales. They might, but they could also be more use­ful as an admin or report­ing tool – and not worth the expense — unless you run bot­tom-line think­ing, first.

When a new idea, oppor­tu­ni­ty or invest­ment aris­es, it’s impor­tant it be pre­sent­ed by the leader of that part of the busi­ness and a senior per­son on the finance team. If they are both excit­ed and con­vinced about the num­bers and the impact on the busi­ness, then you like­ly have a fair­ly good case, ready to eval­u­ate against oth­er opportunities.

While you can’t always pre­dict every­thing, you do need that dis­ci­pline and rigour in your thinking.

It’s not that every deci­sion has to impact the bot­tom line – for exam­ple, you may choose to improve your cul­ture to attract amaz­ing tal­ent — but, at a min­i­mum, you need to think about it and ana­lyze it from that point of view.