the challenges with growth
Growing a company is hard work. It takes patience, confidence and perseverance.
Do you even know where to start? Do you find yourself spending more time in your business trying to put out forest fires than you do working on your business? Once you make the time to work on your business how do you prioritize the work? Great, now you got the growth going, can you keep the momentum?
The "5 Things Matrix is designed to answer all of these questions.
The "5 Things" Matrix
The "5 Things" matrix is an innovative business plan development tool. It matches the critical metrics of 1) Hard Work, 2) Quality, 3) Efficiency, 4) Value and 5) Teamwork to the core business functions of Human Resources, Operations, Sales/Marketing and Administration.
Starting Point: The Income Statement
How did we come up with The "5 Things" matrix? It started with trying to understand the Income Statement and how certain moves we made affected it.
The Income Statement is how businesses score themselves. The win/loss column is made up of four parts:
2. Cost of Goods Sold (GOGS)
3. Gross Profit
4. Expenses (leading to Net Profit)
Unfortunately, the Income Statement is one of the WORST score cards a business can use. If one area goes up while another goes down it is nearly impossible without lots of digging through many different data points to figure out why. The "5 Things" matrix is the fastest and clearest way to understand the underlying causes.
Lets break down the Income Statement and The "5 Things" matrix:
We have paired Sales on the Income Statement with the core business function of Human Resources. Without employees making, selling and administering there is no company to sell anything.
Core Business Function - Human Resources
Human Resources is responsible for recruiting, retention and training. Unfortunately, Human Resources is normally the most neglected core business function. It should be given the highest priority with the right amount of resources needed to perform its vital role.
The "5 Things" Metrics Applied to Human Resources
Hard Work Metric - Number of Employees
Is your Human Resources staff working hard to recruit employees into your company? If you need 100 employees why do you only have 80? The wrong number of employees puts undue stress on the rest of the organization.
Quality Metric- Average Tenure of Employees
Now that you have the right number of employees it is time to look at their quality. A high average tenure is a good sign that you have recruited the right employees (do you turn over employees every six months or do they stay for many years). This metric is the MOST IMPORTANT metric for any company. Long term employees will know how to handle the fires when they arise.
Efficiency Metric - Training
Good job, you have the right number of long term employees. It is now important to build a training plan that doesn't break the bank. Most companies use a poorly designed On The Job Training (OJT) approach. This metric is THE HARDEST of all the metrics for a company to get right. A properly budgeted training plan makes growth easier.
Value Metric - Sales per Employee
Now that you have the right number of long term, well trained employees what's the value should you receive? Sales per Employee is that metric. It shows you if management is able to grow sales faster than they need to add employees. This can only happen with the right number of well trained, long-term employees.
Human Resources is THE MOST IMPORTANT core business function. Without the right number of long term, well trained employees a company will have a hard time growing. This is why Human Resources is the cause of a company's success (or failure). Look here first when trying to figure out why your company is having problems.
Cost of Goods Sold
We have paired Cost of Goods Sold (COGS) on the Income Statement with the core business function of Operations. Operations is responsible for driving down the cost per unit manufactured.
Core Business Function - Operations
Operations is responsible for the output that your customers buy. In the Lean Manufacturing world customer will not pay for processes and procedures that don't add value to the end product. This is why it is necessary to have a lean operation with no extra frills, just the essentials.
(note: this isn't just for manufacturing, it can work in many industries like distribution, web designers, retail, non-profits, etc.)
Hard Work Metric - Sellable Output
The word "sellable" is important here. This is only product that could be sold to the end user. Any scrap or low quality output will not be contained in this number. The hardest part is figuring out what is that single unit of measure that can be applied across all your products (but it is possible with some creativity).
Quality Metric - % of Quality Output
This metric IS NOT to be used for the direct quality of the product. It should take a higher meaning. As an example: for a manufacturing or distribution company, their Quality metric could be Inventory Turns. Is the company making their output for a warehouse (low inventory turns) or is it making it for customers (high inventory turns)?
Efficiency Metric - Ratio of Output : Space/Time : Employees
For the output that you created, how well are you utilizing your space or time and your employees. This normalized ratio will allow management to compare periods of time against each other to see if for the same amount of output they needed more/less space (or time) and more/less employees.
Value Metric - Cost of Goods Manufactured (or Sold) per Output Created
Now that you have the right amount of quality output that were efficiently created what value should you expect to receive for it? The Cost per unit of Output is that metric. It tells management if they are able to drive down costs as output increases. If not, if gives clues as to whether it is the Manufacturing Overhead, Direct Materials or Direct Labor that is to blame.
Teamwork Metric - What Enhances the Value
What do your employees do like a team to decrease the Cost per unit of Output? For a manufacturer it could be cross training of employees across manufacturing lines so when someone is sick or quits others can fill in and keep the lines moving. Having employees work well together can greatly enhance your value metric.
After Human Resources, Operations is normally the next highest priority. Having your sales team sell capacity that operations can't deliver on is normally frowned upon (except for in a start up company where you sometimes "fake it till you make it").
We have paired Gross Profit on the Income Statement with the core business function of Sales/Marketing. Anyone can generate sales. It is the mark of a good sales or marketing team that can bring in high Gross Profit/Margin to a business.
Core Business Function - Sales or Marketing
Sales or Marketing is responsible for driving Gross Profit into the company. This is the fun part of the business and normally gets the most resources. Most companies have one group (sales or marketing) that takes that lead. With a company of professional salespeople knocking on doors, Sales is the lead while marketing supports them with leads. In other cases, Marketing takes the lead by driving phone calls into a call center where customer service people take orders.
Hard Work Metric - Main Gross Profit Generating Task
What is the main task that your sales or marketing team does to drive gross profit into your company? Do your salespeople have to visit so many customers every year (main task = # of customer visits). Or does your website take the lead in selling your product (main task = # of visitors to your website)? Figure out what that task is then remove all barriers to increasing it (think administrative paperwork, order tracking, unnecessary meetings, etc.).
Quality Metric - % Quality of Main Task
While it is great that your salespeople are making lots of calls or that your website is getting lots of visits how do you know if they are quality appointments or quality website hits? For salespeople you could track % of marketing leads (good) vs. cold calls (less good). For your website it could be % of return visitors (good) vs. new visitors (less good).
Efficiency Metric - Ratio of Main Task : Sub-Task : Sub-Task
There is a famous sales ratio called 10 : 3 : 1. For every 10 Appointments, a salesperson should get 3 Quotes and then 1 Order. What about your website? For every 1000 Visitors how many should go to the Products Page and how many should Purchase? Understanding how efficiently you achieve gross profit is the best way to be able to improve it.
Value Metric - Gross Profit per Main Task
Now that you have the right amount of quality gross profit generating tasks that were efficiently achieved what value should you expect to receive for it? The Gross Profit per Main Task is that metric. This metric tells you how well your sales or marketing efforts work. If you aren't achieving the results you want you may need to re-think your go to market strategy.
Teamwork Metric - Value Enhancement
Do your salespeople work together or are they in it for themselves? Do your employees work their social media accounts to drive people back to the company's website? What can your employees do as a team to drive additional gross profit into your company?
Sales/Marketing are the third priority. Increase your output capacity (Operations) and demand your sales or marketing teams fill it. Remember though, any idiot can get you sales. What you need are profitable sales. Tracking profitable sales as a function of that main task will force management to strip away any extra, non-gross profit producing tasks from the organization.
Expenses / Net Profit
We have paired Expenses & Net Profit on the Income Statement with the core business function of Administration. The administrators of the company are responsible for setting budgets, assigning priorities, managing cash flow and watching the "bottom line."
Core Business Function - Administration
The Administration core business function provides the overall company direction to the rest of the company. It is responsible for keeping expenses in line with the budget, cash flow and overall Net Margin.
Hard Work Metric - Expenses
What are the total expenses of the company? What is the trend year over year or quarter over quarter? Are they following the trajectory that you expect? Tracking the expenses per unit of output (Operations Hard Work metric) is another critical trend reporting tool.
Quality Metric - % of Budget
Is the company on budget or not? Why not? Is there a lot of turnover in your organization with new employees that bust the budget from mistakes or additional training costs.
Efficiency Metric - Cash Flow
Cash is King!!! Without cash even a profitable company will go out of business. If your company is in need of a turnaround you may need to create a 13 Week Cash Flow Statement. You must track how well your company manages their cash position.
Value Metric - Net Margin
Now that you have the right amount of on budget expenses that created a positive cash flow environment what value should you expect to receive for it? Net Margin is that metric. Net Margin also takes into account the full chain of events (Human Resources, Operations, Sales / Marketing) and their successes or failures.
This is the end of the line. The Administrative core business function will be the result of all your hard work in the Human Resources, Operations and the Sales / Marketing core business functions. This is an interdependent model where one problem causes problems in other areas.