Are Your Revenue And Productivity Trends Polar Opposites?
“So, Randy, how is business going?”
“Great, mom! We have grown from three to nine offices, we have over 200 employees and our sales continue to grow rapidly!”
In the late 1990s, this was my response as an ambitious, but inexperienced entrepreneur whenever my family asked about work. At the time, our business had grown an average of 50% per year for nearly a decade. More offices, more employees, more revenue. We were feeling pretty good about ourselves.
Let’s take a look at an example of the numbers of a similarly successful high-growth company, like mine:
How does this business look like it is doing? Revenue is up dramatically. Net profit is highly consistent, at 10% of sales. The employee base is growing, as well, so opportunity is clearly being created. The company has built an amazing culture and applications to join this success story are flooding in!
Would you be happy if you owned this business? Most entrepreneurs would answer yes, absolutely.
If there is a problem, what is it?
We are all familiar with the terms quantity and quality. Quantity metrics like revenue and profitability show us how much we are doing. Quality measurements indicate productivity—how efficiently we are actually operating the business.
Let’s look at this same company’s growth from a different angle, this time with productivity metrics.
Wait, what just happened? These two charts are polar opposites, heading in very different directions! How can a company that seemed to have everything going in its favor have such negative trends in its productivity metrics?
In the midst of growing my own businesses, our leadership teams were always keen to monitor when the staff was becoming over-burdened with work. When this happened, we added more employees. I consistently let my leaders know that I fully supported them and would give them what they needed to be successful. I would say yes, without hesitation, because our financial numbers were trending so positively. Hire away!
What was I missing? I had not yet implemented productivity metrics for our business.
The problem became—as we hired more people—that we were building a more inefficient organization and we didn’t know it. Sales were skyrocketing, people were excited to be a part of the business, and the numbers certainly looked great! But the reality was that more employees and more salespeople were producing less than they did the year before, consistently.
In chapter 9 of my best-selling book, The Second Decision; the qualified entrepreneur, published by ForbesBooks, and in a recent column for Forbes titled, “The Entrepreneur’s Road to the Diamond Mine,” I illustrate that pure gold is sitting inside of a company’s numbers; it just needs to be mined. Remember:
All successful, high-growth organizations must mine, develop and implement the right metrics in their business.
Let’s take a different look at our young success story, but this time, rather than keeping profit percentage consistent each year (and watching productivity dip), let’s keep the number of employees and revenue per employee constant. Look what happens to the sales and profitability:
The lesson here is to imagine what your financial results will look like over time when you raise the bar on productivity and increase your revenue per employee and revenue per salesperson metrics in your business!
Your next challenge in your entrepreneurial leadership journey is to observe both quantity and quality metrics, work to focus on and improve them, and understand that being more productive does not equal longer working hours for your employees. It translates to working smarter, which can ultimately be less than they are doing now!
There is pure gold in your company’s numbers. Drive your company’s growth with the right metrics and begin working smarter, not harder. The results will be priceless.
If you have an interest in learning more about this topic, please e-mail me at rnelson@gold-dolphins.com, visit my website at randyhnelson.com, or plan on attending one of my financial workshops that I hold for entrepreneurial leaders and their financial teams.
Randy H. Nelson is a serial entrepreneur, speaker, coach, former nuclear submarine officer, and author of The Second Decision with ForbesBooks. Learn more at randyhnelson.com.