We decided that rather than putting more rules and procedures in place, we would continue to do two other things:

1. We would find new ways to increase talent density. In order to attract and retain the best people, we would have to make sure that we offered the most attractive methods of compensation.

1. We would find new ways to increase candor. If we were going to remove controls, we would need to make sure that our employees had all the information they needed to make good decisions without management oversight. This would require increasing organizational transparency and eliminating company secrets. If we wanted employees to make good decisions for themselves, they would have to understand as much about what was going on in the business as those at the top.

In general, you’ll pick a Critical Number that will address either an opportunity or a challenge on the People/Balance Sheet side of the business (e.g., reduce employee turnover, improve customer service scores, or dramatically reduce a credit line with the bank) or the Process/Profit & Loss side (e.g., improve gross margins, reduce production cycle time, or increase sales close ratios).

Our pet peeve is when a company’s leaders think it should grow regardless of profit. This is just reckless, unless you’re 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.

In Gary’s case, volume is detrimental to cash. The more Gary sold, the worse his cash got (his gross margin percentage was 31%, while his working capital percentage was 41%).

To tackle the cash conversion cycle, start by reading “How Fast Can Your Company Afford to Grow?” a Harvard Business Review article by Neil C. Churchill and John W. Mullins.