Value Creation Vector<\/a>, I provided an overview of the tool and how it can drive focus, prioritize actions and deliver results for companies. Today, I\u2019m going in more detail about the first lever: \u00a0Profit Potential.<\/p>\nI wrote this in the last post, but it bears repeating:<\/p>\n
Profitability is the ultimate barometer of a company\u2019s health. \u00a0Optimizing profitability is the easiest way to assure long-term viability. \u00a0Job one is to assess the company\u2019s potential to improve profitability. Even if growth is the ultimate goal, why grow something that\u2019s mediocre (or worse), when you can grow something that\u2019s healthy and profitable? \u00a0I know, I know, improving what you already do may seem boring compared to shiny new objects (growth! innovation! acquisitions!) that are often hard to resist. But, I\u2019ve yet to encounter a company that has maxed-out its existing Profit Potential.<\/p>\n
So, what do we do we consider when we assess a company\u2019s profit potential? \u00a0We look at several profitability factors that Create Near-Term Value, Position For Long-Term Value and Unlock Hidden Value.<\/p>\n
![\"VCV-ProfitPotentialMatrix\"](\"https:\/\/enlightadvisors.com\/blog\/wp-content\/uploads\/2019\/02\/vcv-profitpotentialmatrix.png\")
<\/p>\n
Create Near-Term Value<\/h2>\n
We start the assessment with the factors that impact near-term profit potential because small changes in these factors can have significant and immediate impacts on profitability. \u00a0These factors practically generate free money for companies. \u00a0How can that be bad?<\/p>\n
The factors we consider are:<\/p>\n
1. Management Metrics<\/strong> – What are the key metrics the management team uses to monitor company performance and drive decision-making?
\nWe want to understand if the metrics are:<\/p>\n\n- Strategically Aligned<\/li>\n
- Internally Consistent<\/li>\n
- Comprehensive<\/li>\n
- Visible and Transparent<\/li>\n<\/ul>\n
2. Sales Management<\/strong> – How effectively is the sales team managed to sell current products or services to current customers and potential customers?
\nWe want to understand if the sales team has:<\/p>\n\n- Sufficient Customer Coverage<\/li>\n
- Appropriate Sales Metrics<\/li>\n
- Effective Sales Incentives<\/li>\n
- Accountability for Discounting<\/li>\n<\/ul>\n
3. Pricing Alignment<\/strong> – Are current prices, pricing strategy and day-to-day process pricing management aligned with each other – and with the company\u2019s overall strategy?
\nWe want to understand if current pricing is set to maximize value creation by assessing:<\/p>\n\n- Pricing Calibration: \u00a0Too High, Too Low, On-Target<\/li>\n
- Cost Calibration:\u00a0 Accuracy, Completeness<\/li>\n
- Discounting Frequency and Magnitude<\/li>\n
- Current Price-Setting Methodology<\/li>\n<\/ul>\n
Position For Long Term Value<\/h2>\n
By definition, factors that help a company capture long-term value require more time, first to determine the appropriate action and, then, for those actions to impact profitability. \u00a0In addition to improving profit potential, optimizing these factors makes the company more proactive, more productive and more resilient over the long-term.<\/p>\n
The factors we consider are:<\/p>\n
1. Revenue-Driver Management<\/strong> – Does the company understand what drives revenue and apply that knowledge to day-to-day decisions?
\nWe want to understand if the management team:<\/p>\n\n- Understands Revenue Drivers<\/li>\n
- Assesses Revenue Drivers With Metrics<\/li>\n
- Ensures Metrics Are Transparent<\/li>\n
- Maintains Accountability For Revenue Drivers<\/li>\n<\/ul>\n
2. Cost-Driver Management<\/strong> – Does the company understand what drives costs and apply that knowledge to day-to-day decisions?
\nWe want to understand if the management team:<\/p>\n\n- Understands Cost Drivers<\/li>\n
- Assesses Cost Drivers With Metrics<\/li>\n
- Ensures Metrics Are Transparent<\/li>\n
- Maintains Accountability For Cost Drivers<\/li>\n<\/ul>\n
3. Brand Image Alignment<\/strong> – How well is the brand aligned with day-to-day operations?
\nWe want to understand if the company has achieved:<\/p>\n\n- Brand Honesty<\/li>\n
- Marketing Material Alignment<\/li>\n
- Competitive Differentiation<\/li>\n
- Sales Alignment<\/li>\n<\/ul>\n
Unlock Hidden Value<\/h2>\n
The factors that unlock hidden value are often overlooked and not necessarily intuitive.\u00a0 However, they make the company stronger and improve profit potential.<\/p>\n
The factors we consider are:<\/p>\n
1. Business Model Clarity<\/strong> – Has leadership helped employees understand how the company makes money so day-to-day decisions contribute to improved profit potential?
\nWe want to understand if the entire company understands the reality and importance of:<\/p>\n\n- Revenue Drivers<\/li>\n
- Cost Drivers<\/li>\n
- Individual Impact on Results<\/li>\n
- Collective Impact on Results<\/li>\n<\/ul>\n
2. Employee Dynamics<\/strong> – Does the company understand how important employees are to driving value and are they effectively managing the workforce to reflect their importance?
\nWe want to understand if the company is assessing and managing:<\/p>\n\n- Culture Alignment<\/li>\n
- Workforce Strategy Alignment<\/li>\n
- Comp and Benefits Alignment<\/li>\n
- Employee Retention<\/li>\n<\/ul>\n
3. Balance Sheet Strength<\/strong> – Has the company managed the balance sheet to support profitability and cash flow?<\/p>\nWe want to understand the ability to improve profit potential through:<\/p>\n
\n- Accounts Receivable Days<\/li>\n
- Accounts Payable Days<\/li>\n
- Fixed Asset Utilization<\/li>\n
- Leverage Ratios<\/li>\n<\/ul>\n
Let’s say it one more time:\u00a0\u00a0Profitability is the ultimate barometer of a company\u2019s health. The most successful companies get their existing house in order before\u00a0seeking expansion.\u00a0 No matter your industry, systematically addressing the factors that impact Profit Potential will position your company for successful growth.<\/p>\n","protected":false},"excerpt":{"rendered":"
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![\"CubaGoodingShowMeMoney\"](\"https:\/\/enlightadvisors.com\/blog\/wp-content\/uploads\/2019\/02\/cubagoodingshowmemoney.gif\")
<\/p>\n