In business, money matters.
But so do people, and according to Peter Mantell, the owner and managing partner of Independent Consulting Associates, you'll never find success in business (for-profit or non-profit) without focusing equally on both.
In the latest episode of our podcast Put Your Numbers to Work, GrowthForce CEO, Stephen King, sat down for a discussion about business planning and strategy with Peter Mantell. During their conversation, Peter outlined his five-part approach to achieving profitability, which combines financial management strategy with a human capital management strategy to institute and execute the perfect business plan.
The 5 Steps to a Profitable Business Plan, According to Peter Mantell
When Peter sits down with clients, he guides them through this five-step process to creating an effective business plan that will cultivate a rewarding company culture and generate profits.
1. Determine Why and How Your Business Exists
Your business must have a clearly defined reason to exist.
Even shell corporations — with no employees, no location, and no production — serve a designated purpose. Before you can build a company, you must determine why it should exist, what it will do, and which customers it will serve. Build your business around its unique value proposition (what distinguishes it from the competition).
"And since nothing happens in a vacuum," Peter said, "you need to very acutely understand your competition that is in the same business segment, that may offer the same products, that deliver through a technology."
Studying and understanding your competition and specifically what they bring to the marketplace will help you differentiate and establish your business's unique purpose.
Establish a reason for your business to exist by using different technologies or offering exclusive products, services, or pricing models.
Peter went on to explain that once a reason for existence has been established, a business owner has to figure out a way to exist, namely funding. During this initial step in creating a business plan, the business owner should consider different avenues for obtaining funding: personal funds, private equity investments, commercial bank loans, friends and family, credit cards, or a combination of sources.
2. Define Your Company Culture and Values
Who are you? What values do you and your business represent? Do you have a mission? These are important questions to answer as you go about making a business plan.
Not only do they add value to your business from a branding perspective, they also directly cultivate company culture, which has the power to make or break your business's work environment, not to mention employee happiness, sense of self-worth, and satisfaction working for you. In other words, a good company culture and business values support strong human capital.
You can establish company values lots of ways.
Some companies choose to do so by using a portion of profits to support a cause, like Tom's donates shoes and Coco-Cola partners with the World Wildlife Fund. Others simply choose to directly involve their employees in achieving company goals with profit sharing and commission-based incentives.
Peter described a work environment with strong values, saying, "You're all aligned in achieving the same kind of goals. You have a mutual respect for each other. You treat, not only one another, but all of your customers in a manner that you wish to be treated yourself. So, the alignment of that particular part of the business allows many great things to happen. Employees embrace the business. They're twice as productive. They don't see the business as a job. It's a mission. They're there every day because they choose to be, not because they have to be."
Assuming candidates have the necessary skills and education, Peter explained why business owners should hire based on behavior. "It's very, very important that the employees you hire, and train, who are the most important asset to the success of your business, embrace the same culture, the values, and the mores that you yourself have built this business upon."
Selecting employees based on values and company culture will ensure your business purpose aligns with your team's higher purpose. Referring to employees working in a positive environment, Stephen said, "[W]hen they get out of bed in the morning, they're excited . . . and they don't quit."
3. Use Budgeting and Job Costing to Set Goals, In Numbers
To establish a business plan, you must know your business goals.
Peter recommends setting goals in five-year increments, suggesting business owners ask themselves the following questions:
- Five years down the road, where do you see your business?
- What kind of revenue do you want to generate?
- What products, services, or new products and services do you want to offer?
- How many customers do you want or need to acquire?
- Do you want to expand to any new markets?
Once you have distilled desirable goals for the future of your business, you need to establish measurable benchmarks for turning business dreams into an achievable reality.
"As you're going down the road and you're growing," Peter asks the questions, "when do you break even, when do you become cash flow positive, and then when are you going to be able to hit the KPIs and profit that you're looking for? When do you hit that internal rate of return? When do you know that an 18% return on your investment requires a 65% gross profit?"
Measurable benchmarks contained in a five-year business plan forecast the answers to these questions. Each answer starts with outlining your current budget and then working up forecasts using incrementally increasing revenue projections, until you hit your target numbers. For example, if your goal is 100% growth and you're bringing in $2 million today, look at your budget with the next year's desired revenue ($4 million), then $8 million, and $16 million.
Once you have the projected numbers, you can determine what levers you will need to pull in your business to actually achieve the desired growth rate. Do you have a large enough client base? If not, what do you need to do to acquire more clients and how much will that cost? Maybe the solution is to sell more products or services to your existing clients or to adjust your pricing structure. If so, what are your options?
When working to grow your business and evaluating your client base, you should also determine which of your customers (and other parts of your business) are the most profitable.
To truly know your business, you must know which revenue channels actually generate profit. Most business owners make the mistake of assuming the clients that generate the most revenue are also the most profitable.
You also should evaluate the profitability of the people within your business.
The sales person generating the most revenue in sales might not be making the most profit, depending on volume and discounts. While an employee who sells only a fraction of the volume might have the largest profit margins.
Profit performance of employees, departments, and clients can be analyzed using job costing, time tracking, expense tracking, and unit economics, which allow you to pull individual profit and loss statements on almost any piece of a business.
When looking at unit economics, Peter said, "we can measure profitability by class of trade and get, for the first time, a real understanding of what pieces of the business make money, what pieces of the business break even but are essential, and there are certain pieces of the business, of any business, that simply don't make money, and, at the end of the day, you don't want to keep focusing on a piece of business that's losing money."
4. How Accurate Was Your Forecast? Keep Score and Adjust
While working through a five-year business plan, you should track how your actual numbers compare to your forecasted numbers. Peter suggests doing so on at least an annual basis.
When comparing your projected budget with your actual numbers, you should assess how the two compare and make adjustments to your continuing forecast or your business operation (such as cutting costs and/or re-negotiating prices with low-performance clients) that will put you closer to your goals the following year.
5. Focus on Employee Retention
In addition to working capital, your unique technology, and value proposition, your people are one of your business's greatest assets.
You invest in them through the process of hiring, training, and professional development, and you maximize your return on this investment by retaining employees. Each time you lose an employee, replacing that individual costs your company additional hiring and training costs, plus the loss of productivity that occurs while a new employee is getting up to speed.
According to Peter, retaining employees comes down to two key components: 1. Proper compensation; and 2. Alignment with the business's core values.
Peter explained that proper compensation is not just about salaries and wages; it's extremely important for company leadership to make employees feel recognized and appreciated. He said, "It's not about the money at the end of the day. When I've interviewed employees that have left [a] company, they [say], 'I am not appreciated . . . I was never rewarded for anything, so I stopped trying to be the best performer I could be." Peter points out that employees feel most appreciated when rewarded and recognized for their discretionary efforts, the moments when they go above and beyond their job descriptions.
In addition, it's essential that your company's core values and mission do not get lost in translation while traveling from senior management through middle management to the employees representing your company each day.
One way company culture and employee comprehension of your business's core values can be assessed is with anonymous surveys. Peter suggests asking employees at different levels to write down the vision, mission, and values of your business. Then ask questions like:
- Do you believe all employees are treated equally?
- Do you feel rewarded for your discretionary effort?
- Are our policies open?
- Can you communicate freely without fear of reprisal?
Evaluating your business's cultural performance and perception at different levels will help you improve company culture from the top down and bottom up to ensure you not only create a working environment that helps you retain employees, but also one that fosters the highest level of work ethic and motivation.
Work Through the 5 Steps to Profitability with GrowthForce and Insperity by Your Side
Let GrowthForce handle your numbers and Insperity help with your people. With our long-term partnership, GrowthForce offers the very best in streamlined job costing, time tracking, and management accounting designed to supercharge growing businesses with an eye on human capital management for the future.