Home > Uncategorized, Your Clients > Educating your clients’ team members about the bottom line

Educating your clients’ team members about the bottom line

September 17th, 2014

When I was in practice one of my favorite services was facilitating Towards Awesome Service. There were several reasons for this: first, it was a very profitable service; second it was fun because the group always got engaged; and third, it inevitably led to more work with the client because it led to immediate results in the business both culturally and financially.One of the most profoundly important elements of the way I presented it was to share with the group in the first session an overview of the financial implications of customer delight – you know, we’d go through the 4 ways to grow a business and how relatively small changes in the 4 profit drivers produced a very significant financial result.

I also showed the group, using the Profit Improvement Potential model (or it’s equivalent back then!) what would happen to the bottom line when the profit drivers went south due to customer loss or referral decline, average transaction value decline, margin shrinkage due to discounting or product mix changes, productivity decline etc. It is amazing how intuitively smart people are when you engage them in the thought processes that sit behind these issues and tie them back to customer service – including by the way, internal customers and external customers.

To bring all of this to “real life” however, with my client’s permission, I shared the actual business P&L financials with the team members. In some cases I was given permission to share the actual numbers, in other cases only a % P&L. This gave me the opportunity to illustrate graphically how thin the bottom line really is. Few team members understand this until they see it.

We also had a lengthy discussion of why they should be interested in the bottom line. It is not just something that goes to the owners of the business but it is, on the one hand, the ultimate measure of the value the business has created for its customers i.e. how successful the team has been in creating and capturing value (which is the essence of good business model design.) But just as important, it is the primary source of funds to finance the growth of the business and therefore opportunities for the team members to enjoy professional growth, continuity of employment, and improved compensation.

One of the illustrations I shared with team members was an analysis of net profit per customer and how important customer retention was to the business. It would go something like this (hypothetical numbers used here):

Here is the data we had to work with from the P&L:

Revenue – 2,025k

Gross margin – 40%

Fixed costs – 660k

Net profit before tax 150k

Number of active customers (actual or estimated using GamePlan) – 1,000

From this data set we can do the following calculations:

Average annual revenue per customer – 2,025

Break even revenue – 660,000 / 0.40 = 1,650,000

Margin of safety (difference between actual and B/E revenue) – 375,000

Number of customers that account for the MOS – 375,000 / 2,025 = 185

This is 18.5% of the total active customer count. In other words, 81.5% of customers are required just to break even.

I would then point out that if the business is open for 5 days a week it does not start to make a profit until Friday! Or another way of driving home the point, on a full year basis, profit does not start to flow until half way through September.

And finally, it’s important to drive home the fact that most businesses experience a natural customer attrition rate of about 20% per year (i.e. customer lifetime is 5 years) which, for this illustrative case, indicates this business is likely to be starting the year in a break-even situation unless and until it picks up a further 18.5% of new customers or improves the average transaction amount and/or its gross margin and/or reduces its fixed costs (not an easy thing to do.)

 

  1. No comments yet.
  1. No trackbacks yet.

Prove that you\'re human by solving this equation: * Time limit is exhausted. Please reload CAPTCHA.