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.