Owners like Gary choose to spend money every day to grow their businesses. However, sometimes they are actually spending their hard-earned money to cover management-influenced waste (read that again).
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Companies can get by with sloppy execution if they have a killer strategy or highly dedicated people willing to work 18-hour days, eight days per week to cover up all the slop. Just recognize youâre wasting a lot of profitability and time (i.e., youâll burn both cash and people in the process!)
Our pet peeve is when a companyâs leaders think it should grow regardless of profit. This is just reckless, unless youâre a venture-backed firm pioneering new territory. For everyone else, we recommend getting profitable with the work you have, proving you can get to 15% profitability (based on our adjusted Simple Numbers), adding labor to knock profit back
to 10%, and then growing to 15% again. Lather, rinse, and repeat.
As a business owner, you should also consider that equity is the most expensive source of funding and that it is usually cheaper to source debt financingâŚ
⌠it is mission-critical over time that management grow EBIT faster than the investment in net operating assets.
To tackle the cash conversion cycle, start by reading âHow Fast Can Your Company Afford to Grow?â a Harvard Business Review article by Neil C. Churchill and John W. Mullins.
These are all executives who have been trained for years to grow their own businesses and are compensated based on their profitability. Suddenly I was saying to them, essentially, âI want you to pay less attention to the business at which youâve been very successful, and start paying more attention to this other thing. And by the way, you have to work on this new thing along with these other very competitive people from other teams, whose interests donât necessarily line up with yours. And one more thing, it wonât make money for a while.