The primary objective of any business is to earn the highest return-on-invested capital (ROIC) for the longest period of time. That's why I believe the "ZEUS" of the BUSINESS GODS is - and always will be...
"THE EQUATION."
Return on Investment. How much money you make in relation to how much money you spend to make it.
"Return" divided by "investment." The amount you make in relation to what you spend. Sounds simple doesn't it?....
The numerator of the equation is the "Return" or the Net Profit. The denominator of the equation is the "Investment" or the amount you had to spend to get the return. Of course you have to consider risk when looking at your potential return. And you have to consider opportunity cost when judging whether to make the investment...
But for me it's that easy: Whenever I debate any allocation of resources I ask myself is if the decision honors "The Equation." Whenever I'm asked to help a friend think through a business issue the first question I respond with is, "How does it honor 'The Equation'"?
Literally each and every decision I make - down to the paperclips - has to serve "The Equation" first. Far too often in my life I've seen businesspeople suffer tremendous financial pain when they forgot this simple but often overlooked fact of business.
Here's one way I put the "Equation" into practice:
How to Honor the "Return-side" of The Equation by "Right-Sizeing" your cost structure ASAFP:
For every $1 in Revenue your company generated last year you had certain costs built in. For example your "Cost of Goods Sold" (COGS) may have accounted for .20 cents or 20% of every $1 in sales. Or your "Selling, General and Administrative Expenses" (SGA) may have accounted for .30 cents in costs for every $1 in sales, or 30%.
The first move you have to make in a declining revenue environment is to make sure that you trim enough from your costs so that - at the very least - they represent the same % of sales as they did, on average, for the past several years. It's called "DEFENDING YOUR MARGINS" and if you don't make it a priority you are at SERIOUS RISK of trading short-term inaction for much tougher long-term pain.
Start by putting tremendous pressure on all of your suppliers to reduce their costs to you. And make sure you negotiate hard - during the recent credit bubble, they had no problem pushing inflationary price increases to you. Just make sure you do the same. Letting go of employees is much tougher then muscling a supplier (which should provide extra incentive for you to negotiate them down).
I was 22 years old (believe it or not) when I started my own brokerage firm and 26 when I had my first round of layoffs. Letting go of good people - especially ones older then more - was among the most difficult times of my life. But then I read a book by Alfred Sloan titled, "My Years With General Motors" and in it he said something that forever changed my life. He said that, although he was the CEO and President of the company, he always looked at General Motors as his "CLIENT." And his sole job was to do what was in the best interest of his "CLIENT" without pride or prejudice. While it's NEVER easy to let go of people you enjoy working with you have to do as I do and pretend you're a lawyer who has to do what is in the best interest of his "CLIENT." Indeed, letting go of "credit bubble" hires will save the rest of the people who still work at your firm and depend on you.
But don't ever forget - EVER - that you have to treat the people you are letting go with the same dignity and respect you would want in their shoes. My grandfather had his share of problems in life but one thing he taught me was to leave a relationship with as much - IF NOT MORE - class then you entered it with. Whenever I hear stories of employees who were let go with little or no severance after years of faithful service I almost always just get sick. Unless the layoff was the by-product of a dire, unexpected emergency (think Lehman Brothers) I think to myself that the boss must either be stupid or petty. "Stupid" because he didn't confront the issue months earlier with a strong severance package (full pay + health benefits for AT LEAST 3 months if at all possible). "Petty" if he or she is just that type who cares about nobody but themselves. Sickening.
(For those of us who've been on the other side of the layoff coin I can only offer some advice Teeka Tiwari offered me 15 years ago when he said, "REJECTION IS GOD'S PROTECTION." As corny as I thought it was when I first heard that I must admit - whenever one business door has closed, the one that subsequently opened was so much better that I often find myself stunned at the opportunities that open up. As hard/depressing/embarassing as going broke in my late 20's was, I wouldn't trade it for anything today. I wouldn't be half as successful had I not learned some very valuable lessons from that experience).
How to Honor the "Investment-side" of The Equation by Staying Laser-Focused on Your Core Business:
Like a long-time employee, getting rid of a business you've spent a ton of money nurturing the past few years can be a very emotional decision. I remember back on Wall Street being confronted with an issue that still haunts me to this day. After investing almost $1 million over 3 years to set up, launch and nurture a money-management firm to compliment our brokerage arm I had to make the decision to kill it. Boy was that a tough one. Not only was I absolutely convinced that we were finally getting some traction but a good personal friend of mine was running it and I had to lay him - and his hard working staff - off. Talk about demoralizing. It's one thing to let go of an obvious candidate - quite another to let go of a group that worked their tails off for a couple of years.
But the numbers told me I had no choice and if theirs one thing I NEVER ignore in business it's the numbers. I would have been lucky to break even in another year and maybe - JUST MAYBE - earn 5% on my investment the following year. If I had billions in capital of staying power I would have played my hand as long as possible. But in a world of finite resources I had to make a decision: focus all of our energy on improving our main business that was earning us - even during the recession - 15% on our invested capital. So focus on your core business because that's proven to be the best investment you can make.
Of course, you can't work on two sides of the same equation seperately because they're both in relation to each other. But it's been an important part of my process because it helps me focus on bite-sized pieces of the business issues in front of me.
We'd love to hear from you: What Business Gods Do You Worship?
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