Armed with a new PhD in Organizational Behavior at the age of 30 Goldsmith was making very good money doing 360-degree feedback consulting when one of his mentors said “Marshall, your problem is you’re making too much money. You’re very successful running around selling days and getting paid.  But you’re becoming addicted to this success. At your current pace, all you’ll do is run around and sell your days. You’ll have a good life, but you’ll never be what you could be.”

His mentor suggested to him that his idea of “success” was limiting his vision of what he’s capable of.  Goldsmith went to to say “I’m convinced that if Paul hadn’t pointed this out, I’d still be doing today what I was doing 30 at thirty.”  It’s amazing how some brief, almost trivial, conversations can be life changing!

This is precisely the same message conveyed by Jim Collins in Good to Great – good is the enemy of great because it causes us to be reluctant to challenge the status quo.  By nature most humans do not generally like to take risks.  Making choices that could result in you moving out of our comfort zone of “good” immediately conger up thoughts of the trade-off between what you believe you must give up and what you stand to gain.

This is natural and yet in my personal experience, and in every situation I’ve been told about by other people, accomplishments I and they have been most proud of have resulted from a career change. If you are interested in this issue I strongly recommend Susan Jeffers’ book Feel the Fear and Do It Anyway.  If you’ve got children or grandchildren it’s worth reading too!

During the last 20 years I have dedicated my professional life to helping accountants experience a more fulfilling life by creating a firm that focuses on creating exceptional value for its clients, team members and owners.  But I did not start my career with that purpose in mind.  It evolved as I’m sure everyone’s has.  After all, when a 5 year old is confronted by a career choice of becoming a CPA or a Fireman the latter will win every time so when does one’s career path become evident and is it a path we really want to be on or is it the result of circumstance?

I’ve had 4 careers. First, as an economist with a government department – in many ways this was a dream job, it was interesting, challenging, for the most part I worked with exceptionally talented people, I got to travel and I enjoyed rapid promotion.  I could look forward to the security (it was tenured position) and perks (e.g. fully funded retirement benefits) that then attached to a government position.  My mojo was intact, I liked to go to work.  But during that time I started a business on the side which turned out to be a financial success but the real payoff was that I got the “business bug.”  This resulted in me feeling a shift in what gave me a positive spirit about what I was doing which led me to walk away from a secure future to pursue my next career.

I enrolled in Graduate School and discovered a mentor who piqued my interest in the role accountants could play in helping small business managers achieve their full potential.  He encouraged me to pursue a research and teaching career.  I loved it.  I’d found my mojo: for a time anyway.  With tenure and the security that offers, it would have been easy to settle into teaching.  I still believe few careers are more noble or rewarding than teaching but as was the case with Goldsmith, a friend said “you’ve got a lot more upside potential in public practice” so off I went on another career change.

Everything I had done before going into practice was a preparation for that excursion into the unknown. When I look back on that now I see what a big risk I was taking financially–a view shared by my first wife I suspect. But once again I’d found my (new) mojo.  I loved what I was doing.  I loved the challenge, I loved my colleagues and I loved our clients.  I felt I was making a difference on many levels so my life had meaning.

Then along comes another opportunity.  This time it’s a small business conference conducted by Paul Dunn in the Blue Mountains bordering Sydney, Australia. Paul said from the stage “… our goal is to change the face of small business on the planet.”  I looked around the room and saw about 130 business owners and I thought “… at this rate that will take a thousand lifetimes but what if we married his incredible energy and insights with my experience and protocols and tap into the accounting channel. That would give us the leverage needed to get somewhere near accomplishing that lofty goal and in the process it will give my colleagues in the profession an opportunity to play off our experience and most importantly, give them their mojo back.”

This is now what I do and each of those career experiences was a building block for the next one.  I have my days like everyone but my mojo is well and truly intact.  It has given me a greater sense of satisfaction than you could possibly imagine.  I’ve been privileged to work with with literally thousands of accountants around the world and many of our team members are now also consulting to the profession in some form or other.  I’m proud of this because I know Paul and I inspired them to take this path and they’re helping the profession rise to greater heights.  But my work is far from done.

When I started on this journey I thought the answer to building a successful firm was to give people a roadmap that provided them with direction together with a suite of tools and methodologies including marketing resources and sales training.  These things are incredibly important but I now consider them to be a table stake in the sense that without them the challenge of building a great firm is daunting and will be harder, take longer and cost much more than you expect.  However, they alone are not the answer for the majority of people.

I’m now certain that personal development must come before practice development.  By this I mean it’s crucial that you have a very clear understanding of WHY you are in practice.  Only then can you have that “positive spirit towards what you are now doing that starts from the inside and radiates outside.” This is a personal thing for sure but when you get to clearly understand WHY you are in practice the other things fall into place and you’ll be amazed at what can result.

Recently we conducted two webinars that were presented by Tim Fitzgerald, one of our members from St Louis, Missouri.  The webinars were about the importance of understanding why we are in practice and are based on Simon Sinek’s bestselling book Start with Why: How Great Leaders Inspire Everyone to Take Action.  Essentially Sinek’s message is that people do not buy what you do, they buy why you do it—Sinek has done a great presentation on TED that’s worth viewing.  If you would like to view Tim’s webinars click in this link.

In the November, 2011 issue of The Harvard Business Review there’s a short article written by Peter Fuda and Richard Badham called Fire, Snowball, Mask Movie: How Leaders Spark and Sustain Change that also points to the importance of having a very clear “why” in any transformational effort.  Click on this link to view a really cool animated movie showing Fuda’s three metaphors that “explain, inspire and accelerate leadership transformation.”

With that in mind I’d like to recount a conversation I had with one of our clients that I recently shared with our members and friends in an end-of-year note. I talked about how easy it is to miss the incredibly important contribution we can all make to our clients and our community when we allow ourselves to be drawn into the “vortex of compliance.”

I was privileged to talk with one of our members from Seattle, Washington, and he mentioned in passing how tough the past few years had been for many of their business clients. But he went on to say that after using GamePlan he had saved one from bankruptcy and had helped another experience a $300,000 increase in profitability (more than double the previous year!) as a result of showing them the folly of dropping prices and the critical importance of focusing on transaction planning and monitoring.

I mention this not to sing the praises of GamePlan (hopefully it speaks for itself!) but because the conversation moved to what I consider to be the really important issue and that is accountants have the power and the position to make a difference in the lives of people.

Randy mentioned that had he not had these conversations with those two clients who knows what might have happened to them—one may have succumbed to bankruptcy and the other may have left $300,000 of profit and possibly $1million of business value on the table.

The conversations that took place were not based on rocket science.  All they took was for the CPA to shift his mindset from that of service agent to change agent.  Change agents literally change lives.  I passionately believe that this profession has people with the skills together with the opportunity and, dare I say in these tough times, also the responsibility to proactively help business clients not only survive but set themselves for long term prosperity.

I don’t know if we’re at the bottom of the business cycle, still on the way down or on the way up but I do know that we are not at the top.  If I were starting a business I would not want to be doing so at the top of the cycle so the way I see it now would be a great time.  That being the case, it’s also a great time to implement a business growth strategy.  The results that Randy helped his clients achieve that I mentioned earlier came from a conversation which, coming from a professional properly equipped with analytical tools, give business owners confidence to take action that will dramatically change their lives.  The most valuable thing we can do for our clients at this time is give them confidence and convey the sense that we care enough about them to have these conversations!

As Marshall Goldsmith notes people have a default response in life to experience inertia—in other words, change is hard for most people.  He mentions that an analysis of his database of 250,000 people “Very few people achieve positive, lasting change without ongoing follow-up.”  This is why I encourage you to engage your clients in a process on regular “accountability” meetings.  Help them create a Management Control Plan that’s built on a profit and cash flow plan and a range of non-financial KPIs.

So my challenge to everyone in our wonderful profession is let’s make 2012 a truly great year during which we do good and have a great life.  Speaking of which, I came across this quote from a book I read some time ago.  It is most appropriate for this time of year and for this point on the business cycle …

A great life would naturally bring more meaning, purpose, love, laughter, wonder and adventure to your days, and, at the end of your journey you would look back on a life of significance, rather than regret, knowing in your heart that you left the world better than you found it, knowing that you made a difference in the lives of others, knowing that you got something wonderful out of it and you gave something wonderful back.  A great life of course is not something we experience; it’s something we create.

The key drivers of profitability are price, variable costs (that is, those costs that vary in direct proportion to sales revenue and which typically are represented by the cost of sales), the physical volume of sales (that is, the number of transactions) and finally, fixed costs or enterprise overheads.

To illustrate this consider a business that has the following financial performance characteristics:

A 1% improvement in each of the four profit drivers for this hypothetical business will yield a 40% improvement in net profit!  An increase in profit of $40,000.  This is shown in the  graph below that is produced by a module in GamePlan called Profit Sensitivity Analysis.

What’s important to notice is the fact that for this business, the 1% improvement in price has more than 3 times the impact of a 1% increase in sales volume and nearly 4 times the impact of a 1% reduction in fixed costs.  This is shown in the screen shot below.

While the relative impact of price compared to variable costs, volume and fixed costs will depend on the financial characteristics of the business, it will always have a greater impact than any of the other drivers and usually that impact will be in the order of more that two to three times that of the other drivers.

The reason for this is quite straight forward.  An increase in price for a given volume of transactions means that not only will total revenue increase but so too will the margin (price minus variable cost) on each transaction.  A reduction in variable cost will change the margin but not the level of revenue.  An increase in volume will increase revenue but will not change the gross profit margin and a reduction in fixed costs will have no impact on gross profit at all.  Interestingly, reducing fixed costs will always have the smallest impact.

For example, in this hypothetical business, fixed costs would have to reduce to $625,000 to achieve the same result as a 1% increase in price.

If you look at a larger change such as a 10% improvement which will take your GP% to 38.18%, the differences are even more dramatic.  With this scenario, a 10% price increase will increase net profit to $350,000 whereas a reduction in fixed costs of $350,000 (43% reduction) would be needed to yield the same profit.

You might be thinking “that’s all well and good in theory, but if I put my prices up by 10%, how much business would I lose?”  That’s a good question but a far better one is, “how many customers could I afford to lose without being any worse off?”  For this business, the answer is 24%.  This would result is a reduction in total revenue of about 16% given a current GP% of 32%.

In other words, you could lose 24 out of every 100 of your “average” customers and be no worse off.  And if that were to happen, which 24 customers do you think you might lose—we suspect it will be the 24 people who are price sensitive and who keep reminding you and your team of that.  You might also want to remember that a 24% reduction in the number of people you service will take the pressure off you and your team members and will, in all likelihood, enable you to cut back on some of your fixed costs.

The strategic implications of this type of analysis are very important.  Most business people are pre-occupied with getting more revenue—often from new customers.  They pay very little regard to the customers they already have and usually adopt the view that price is something over which they have very little control because of competitive pressure.  They also  believe that seeking ways to reduce costs is the most effective way to build a profitable business.

This is absolutely the wrong way to run a business even though it may seem to make intuitive sense that the more revenue you generate the bigger, and therefore the better, your business will be.  It also makes intuitive sense that cost reduction leads to improved profitability.

Let’s first address the cost reduction strategy.  We have no argument with the proposition that reducing costs (whether they are fixed or variable) will improve profit.  But there is a big qualifier to this.  If a cost is necessary for you to do business, then reducing it may also reduce your capacity to do business.

Furthermore, the costs that can be reduced are generally those of a “discretionary” nature and these tend to be the ones incurred today to build the future of your business (for example, marketing, team training, research and development.)  A more useful strategy to pursue is to constantly review your costs and ask yourself the question “what are we getting for what we’re investing here?”, and related to that, “is there a way for us to get greater productivity from the resources that are driving these costs?”

Chasing new revenue and the activity that involves is a major cost driver in itself.  While we tend to describe enterprise overheads as being fixed costs, they in fact aren’t in the long run.  They tend to be driven by the volume of transactions.  If that was not the case every business would find that its net profit margin (that is, net profit divided by revenue) would increase over time.  That is rarely the case in practice.

By far and away the most profitable strategy is to aggressively price your products or services, elect to deal only with those customers who see and accept the value you deliver to them, do not allow customers (or competitors) who are price sensitive to dictate the pricing strategy that you adopt across the board and do not see “big” as being the definition of success and monitor the productivity of the resources that are provided by your fixed costs.  At the end of the day, profit is the only measure of success.  Revenue does not pay the bills or give you the resources you need to grow—that comes from profit.

Listen to a conversation I had with the manager. It’s a 10 minute chat – 10 minutes well invested as you’ll hear some good advice from someone who thinks just like YOUR clients.

One of the matters that came up in discussion was how the FGR model could be used to graphically show the lunacy of focusing on volume rather than margin in tough times so I gave him a working copy of a small Margin Table application for him to take away and play around with.  A couple of days later he sent me a copy of a memorandum he’d just sent to his management team.

I have reproduced his memo below after removing all confidential data but otherwise what you see is what he wrote — this is precisely the sort of analysis every single one of your business clients need to be having with you today.

Hi Team

Please see an attached spreadsheet called Margin Table that graphically shows the negative effects of discounting our pricing to win work and the profit impact  of gaining 1 or 2 or 3 percentage points of margin operationally or as a pricing strategy.

As a team we have had many discussion over the last few months on the impact of discounting work just to win a job and what that means from a revenue perspective to ensure we achieve our profit target.

By making the decision to invest our capacity (a finite resource) in lower margin work, as you can see from the table, the pressure that puts on us to bring in more revenue is great.  Take our budgeted Gross Profit Margin (GPM) of 25% (currently our YTD is actually GPM 23.5%).  If 2009 pans out as expected and economic times become harder and we find ourselves cutting margins to get work or we continually find ourselves chasing jobs on price and cutting margins as a result of competitive pressure we’re going to be for a really tough time.

For example, say we cut our price by 4 percentage points (to a GPM of 21%), to compensate for this deployment of capacity (overhead) at this lower margin we will need to find an additional 19% of revenue to maintain budgeted profitability (or $X.Xm of additional work over and above our budget revenue).  With work already being hard to get, that’s going to be hard to achieve.

Exactly the same thing will apply from an operational perspective.  For example, if we are loosing 4% on the job due to poor supervision, cost management, poor estimates, etc. the same impact applies.  You can also see that if this goes to 10% as a result of both poor management and soft pricing (say a GPM of 15%), we will need to find an additional 67% of revenue ($XX.Xm) over budget to compensate for this and remain at the same profit level.

As you are all aware, any business has an overhead commitment that can deliver a certain capacity.  In our business our capacity is not determined by machine output BUT people output (administration, supervision, estimating, sales, management, etc) and as such any overhead investment can only deliver a finite capacity before additional costs need to be brought into the business.  As you can see at a 10% erosion of margin any business with our GPM will run out of capacity to deliver the additional 67% of revenue required, assuming it can find the new work, no matter how efficient.  As such this business strategy is an irrational and fruitless exercise.

As with all things, the inverse applies (and remember in business it is far easier to loose money than make it).  If we can gain an extra 2% at the pricing stage or drive it operationally on the job, that means 7% less revenue we will be needed that year (assuming a 25% GPM).  With our revenue target of $XX million an extra 2% means we do not need to find $XXXk worth of work to achieve the same level of profitability.  We all know how hard it is to find $XXXk worth of work, it’s usually easier to get an extra 2% operational improvement or increase in price by selling harder the non price benefits of using our services.

This is even more valuable information for the smaller branches as you will run out of capacity far quicker than the larger business units.

I hope this is useful information and please remember it the next time we are having discussions over margins, pricing your next job and why we cannot let them fall.  I understand that all jobs must be priced on a case by case basis BUT the overall end result must achieve the budget GPM (in our group for this year it is 25% – that is a 33% mark up on cost) and every fraction of a % drop from this makes life very difficult, to the point of becoming impossible.  It will also be a false dawn as everyone will be working hard and feel they and the business are very busy but the end results will not be there financially and this can break morale.

This memo reflects the type of conversation every business advisor should now be having with his or her business clients.  In tough times it is margin rather than volume that’s important.

Too many of your clients are knee-jerking into the wrong actions in a desperate bid to maintain market share and you need to be able to show them the way.