I recently attended a presentation by KPMG on mergers and acquisitions. (They did a great job, and since then they have presented to our customers and prospective customers on this very same topic).
As every purchase price was a calculation of EBITDA, I was reminded on the importance of predictable and growing earnings to maximize your sales value. Which got me thinking, it’s not how much we sell that matters to a potential purchaser, it’s how much we keep.
I have two colleagues that run their own businesses. I am very familiar with the owners and the inner workings of each company.
One business is ten times the size of the other company in revenues but only a 1/10th as profitable. Many things separate these two organizations. One is a manufacturer; the other a services firm. However, both are very people- intensive businesses and rely heavily on them to generate revenue. As such, their relative performance could be chalked up to the economy being more favorable to one type of business than the other.
But, in my view of their situation it all comes down to management (specifically management style and the tools by which they manage).
The colleague who is ten times more profitable is meticulous about planning, about cost control, and about operational efficiency. He tracks Key Performance Indicators (KPI), both financial and managerial, and spends his time reviewing and tweaking them to find ways to generate more revenue from the same monthly expenses.
The other colleague is enthusiastic about growth and sales. He spends less time on financial performance, cost control and operational efficiencies, and more time on daily operations and sales activities. He does not measure the return on his investments or the profitability of the work he takes on.
Both have sales teams, both have operation and financial management, but what each prioritizes is very different and the results speak for themselves.
I saw the same results with a distribution company. The company had bought and implemented SAP and had requested me to come in and assess the effectiveness of their use of this system.
SAP like any ERP system is a large investment and to the owner’s credit they wanted to maximize their investment. After a review of their SAP system, I quickly noticed that none of the financial controls within their system were being utilized. No budgets, no alerts, no approval procedures, no management reporting.
Nothing.
The results again spoke for themselves; on $15M in sales they had a profit of $50,000.
In both cases of high growth and low profit, the owners knew their business, had many happy clients, had satisfied staff, and generated strong sales.
They’re good managers.
The good news is that this high sales; low profit scenario for both companies can be fixed relatively easily.
As the owners/CEOs of these high sales; low profit businesses to keep more of what they sell, they need to reprioritize the importance of the numbers within their responsibilities.
If it is not a high priority or an area of competency for them, then it is necessary that they employ someone who has the expertise and equip them with the necessary tools to manage the numbers.
Key business management tools must include the ability to manage budgets, alert to deviations from work flow, deliver real time job/project costing, enforce approval procedures, and not only provide strong financial reporting, but also strong managerial reporting in the form of KPIs.
With predictable growing profits, when the day comes to sell, they will absolutely maximize their return.
