I’ve found that many struggles businesses face come from having the wrong mindset. We can’t move forward when we’re too focused on what we’ve already done. We need to think less about the past and more about the future. We need to think less about efficiency and more about value. And we need to change the way we think about success.
Making data useful
How are you measuring financial success? Are you using standard financial KPIs? Gross profit margin, operating profit margin, net profit margin, working capital, EBITDA, ROI… do you really know what they all mean? Not literally, but what they mean for the business on a day-to-day level? What actions will you take based on those measures?
While these measures are useful, they don’t help you impact the future. We call these financial KPIs “lagging indicators”. This means that they reflect past performance, output that has already occurred. They establish your baseline for future performance, but they don’t help you move the needle on what you do next.
What businesses really need are “leading indicators”, which help guide future results in your business. One important way we can start using more leading indicators is changing the way we view profit.
The definition of profit
Usually, profit is determined by subtracting your expenses from your revenue, giving you a formula that looks like this: Profit = Revenue – Expenses.
But the approach I use comes from the Mentor Plus Level 5 Advisory training that I use with my own clients. The new formula is Profit = People × Process.
Expenses and revenue are just results of choices you’ve already made or actions you’ve already taken. They’re the effect, not the cause. Your people and your process are the cause. The processes you follow and the people who are taking actions in those processes are what gives you the lagging indicators of expenses and revenue. To measure profit proactively, looking at leading indicators, we need to look at your people and the processes they apply to produce results.
A business is a series of inputs and activities that result in a product and profit. Consider tax return preparation, for example. As accountants and tax professionals, we take inputs from clients in the form of their financial information. We have our staff use that information and perform activities to produce a completed, filed tax return. That’s our product, and where we get our profit.
This applies to other businesses, too. As a chef in a restaurant, you take inputs in the form of your ingredients and tools, perform the activities of preparing and cooking the meal, which is your product. You likely also have service and dining inputs and activities that affect your end profit. If we only measured that profit in terms of how much we got paid and how much it cost us to make that tax return or that gourmet meal, we’d be missing a lot of information. If you want to change your outcome (revenue, expenses or profit), what you need to look at is the inputs and activities to determine what led to that outcome. In our kitchen example, you would look at the steps that precede meal prep. What processes are applied in the kitchen? Who orders food? How often? Is there waste? How much? What might we count related to those activities?
Efficiency vs. Value
We tend to think increasing efficiency is the best way to increase profits. After a busy season—like tax season, for us accountants—we tend to look at ourselves and try to figure out how we can be more efficient. But sometimes, increasing efficiency just means doing the wrong things faster.
If you have a product that isn’t selling, producing it more efficiently is not going to make it fly off the shelves. Instead, we need to consider value. That product simply isn’t valuable enough to customers and clients.
We need to look at what clients really want and put ourselves in their shoes. It’s all about being client centric. Look at your business from their point of view. For accountants, that means considering how a business owner will use the materials you send them. Is your product really useful, really valuable to the client?
When we say we offer advisory services or business consulting services, what we really mean to say is we’re offering performance measurement. We need to make results visible. People need to know if they’re succeeding or not while they’re doing their work, not after it’s done. That’s what’s useful. That’s what’s valuable. That’s how you change your business: first by changing your mindset and then by working with your clients to identify the kinds of predictive indicators that can help them achieve their desired financial outcomes.
About Geni Whitehouse, CPA, CITP, CSP
A multi-tasking southerner-turned-Californian, Geni helps accountants become Level 5 advisors through The Impactful Advisor, works as a winery consultant at Brotemarkle, Davis & Co, and writes for accounting industry events and publications at Even A Nerd.
A regular keynote presenter at events around the world, Geni is also the co-founder of a remote bookkeeping business at SolveServices and author of How to Make a Boring Subject Interesting: 52 Ways Even a Nerd Can Be Heard.
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