The Power of 3

The Power of 3

After nearly a quarter of a century in business, and a career built on being a “strategist” I now maintain that “Strategy” is for amateurs and “Logistics” is for professionals.

In business it’s the little things that matter most. The visionary 5  year strategic plans are usually pipe dreams.

When it comes to crafting the Business Plan, the next 3-5 years should be distilled to one page and the rest of the plan should focus on the operating challenges and opportunities over the  next 12 months. That’s what I call “strategic operational planning”.

As part of my Twoeyes strategic consulting activities, I have acquired a number of equity interests in early-stage ventures with high growth potential. I recently exited one business via a sale to a US multinational. It didn’t do as well as shareholders might have liked but at least it can be classed as a successful exit.

As part of my  modest equity portfolio, I also own a business that provides a great paediatric allied health service to kids with developmental challenges in their movement play, speech, language, learning and behaviour.

After 15 years of ownership, shareholders are actively preparing the business for sale should a potential liquidity event present itself over the course of the next few years.

Finding a buyer will be a “strategic challenge” but crafting a plausible financial story and operational business model that delivers profits on a continuous basis will be the “Logistical imperative”.

In developing our operating budget over the 12 months of FY2014, I was struck by the immense power of doing just 3 things right every day.

I am no financial man – numbers just aren’t my forte – but as I played around with financial scenarios on my spreadsheet, I was wide-eyed to discover that we could increase our net profit by a staggering 61.75% by leveraging just 3 operational issues.

1. Increase sales by just 5%
2. Reduce product cost by just 5%
3. Reduce overhead expenses by just 5%

While this may be old news to hardened financial colleagues, it might well be of real value to many a business owner and entrepreneur who like me are more market driven than numbers orientated.

Do the maths – it is bitter sweet:

Before $ After $
Sales. $1m $1050000
COGS. $700K $608250
GP. $300K. $351 750
Overheads. $200K $190000
Net Profit. $100K. $161 750

Profit improvement    $61,750 or 61.75%

However, the reverse is also true:

Net profit will fall by a dramatic 58.25% if the following combination occurs:

1. Sales fall by 5%
2. Product cost increase by 5% and
3. Overheads increase by 5%

Before $ After $
Sales. $1m $950000
COGS. $700K $698250
GP. $300K. $251750
Overheads. $200K $210,000
Net Profit. $100K. $41,750

Overall drop in net profit of $58,250

I refuse to believe that every Australian business can’t improve sales by just 5%, reduce product cost and operational overheads by 5%.

It’s time for the logistical professionals to enter the fray and stop the strategists from distracting everyone’s attention with great plans and long term visions.

Lets get the balance right of strategy and logistics and the bottom line will improve dramatically. Once that happens, attracting investment, improving business valuation or exiting the business profitably will become much more realistic.

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