By Larry Coté, Managing Director, Lean Advisors Inc.
I recently came across an article in the National Post titled, ‘Our Economy Doing Worse Than They Say’ by Adam Zivo (December 28, 2023). The article focused on how a country’s economic status can be misled by not assessing numbers and indicators properly, which in turn leads to a false comfort level amongst citizens and those leading the country. His findings and thoughts led me to thinking about the similarity to situations we have witnessed with businesses/organizations over the past 25 years, throughout North America. We repeatedly encountered companies that were using numbers and financial indicators that limited their understanding of how well the company was doing.
Most organizations we have worked with focus on revenue growth as the measure of success. And by doing this, they usually determine that they need more space, more equipment or more labour. That can be a very slippery slope.
Growing revenue doesn’t necessarily mean that you will increase your bottom-line results. Implementing change based on that limited thinking has minimal success and in many cases, leads to less than expected results and creates an even bigger problem. They often find themselves to be no more competitive in their sector and in many cases, the competition is using the same tactics.
Adding people, space, equipment and technology may well increase sales and revenue, but this top line number alone will not give leadership the necessary information to make decisions on the future needs of the company. This limited data tends to cloud reality. Often, this ‘go to’ solution becomes the only answer, and some organizations find themselves wanting to add more and more.
The reality is that you can’t build a successful business by purely spending on capital assets or labour. This type of thinking will lead to temporarily fooling yourself that your company is heading in the right direction, while the base of your company is in fact slowly crumbling. It is much more complex.
There is an exception to simple top line analysis: top line numbers may improve with capital investment, and with increasing number of employees, IF demand matches the productivity forecasts. Unless you have that magical crystal ball, using long-term forecasted numbers is very risky.
Of course top line numbers are important, but they are only one isolated data point. When you combine your analysis with other critical indicators/outcomes, such as the overall cost per person of providing the service or product, plus cost of quality and flexibility to meet customer service expectations, you get a more accurate understanding of the requirements necessary to reach the next level of sustainable success and profitability.
True success is when you maximize the resources you currently have, and then, and only then, will you understand what investments the company needs in order to drive to the level of success – growing revenues and profit simultaneously. Optimizing ‘what you have’ first will allow you and your team to make the ‘right’ tactical and strategic adjustments. The top line number alone can impede your judgement, and make decision-making very challenging. Take the time to do a proper analysis with all the facts/measures on-hand and understand your current potential, prior to investing.
As Adam Zivo wrote, “don’t get fixated on creating the illusion of economic resiliency”. Businesses don’t need illusions, they need reality.