One of the most satisfying things about my consulting practice is the effectiveness of working with clients for a period of five years or more. I’ve got a number of clients I’ve worked with over five years, some over ten years. In the case of these long-term clients, we’ve been able to achieve much. That’s satisfying but it is even more gratifying to see the difference in the quality of the lives of these owners.
The common characteristics of these client are several. They have a good rate of growth and strong profits. Things are working. With strong profit margins, gross and net, they are able to maintain a Balance Sheet with very little debt, thus reducing any personal risk. Cash balances are robust and cash planning is a task we devote very little time to.
We watch three main KPIs: Sales in absolute terms, gross profit margin as a percentage of sales, and net income as a percentage of sales. I see a lot of “data-driven” organizations with a lot more data to look at. Sometimes that makes sense, but the exemplars I’m thinking of spend more time doing business and making money rather than pouring over lots of data. Don’t get me wrong, we watch the three KPIs mentioned above very closely.
If margins slip, we drill down into the details and analyze why. We might drill down on jobs, product line, salesperson, customer, or any other way to segment the business. But losing money is not tolerated. Losing money is a state of mind. Losing money is attacked as if it were cancer.
What sort of margins do most businesses look for? Gross margin varies a lot by industry, but net income varies less. There are many exceptions, but for an awful lot of businesses, net income after everything (except income taxes) should be around ten to 20 percent. Again, there are a lot of exceptions to that. I see businesses that run well and are lucky to do four percent. I see businesses that seemingly coast along and do 40 percent. Both are outliers. Around ten to 20 percent of sales is not an outlier; that’s where most good businesses congregate.
Do you know what the cool thing about a business that churns out this kind of profit year-after-year is? There are a lot of cool things about such a business! Profit is good, which makes cash flow good, which makes enterprise value high. And there are people who want to buy your business when the business is like this. Life becomes pretty rosy for the owner of a business like this.
No wonder they are fun to work with. Plus, I see the real difference owning this type of business makes to one’s life. I get the satisfaction of having contributed to that. It feels good.
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