Cut the jargon ...Let's talk business

If you cannot explain it to your 6 year old daughter,you have probably not understood it yourself says Albert Einstien. The trouble is that most executives don't have to explain it to their 6 year old daughter but to boardroom members who are so used to hearing management gibberish that it doesn't make sense unless its gobbledygook.

The truth is that business is simple.People make it look complicated to retain their jobs. If an organization does not develop the culture of calling a spade a spade in most simplest terms so people cannot hide under performance its a matter of time that there will be very little left to discuss. I was reading a book by Ram Charan who is hailed as the global CEO guru and I was amazed how easily he explained the concept of measuring business performance. The content of this post are largely inspired by what I learnt from him with a generous 'chip in' from me here and there. Let's get started..

Business acumen is not an arcane or complicated skill.Every successful business person has business acumen,including unschooled vendors who sell their wares in third world open air markets. 

If you think about those business fundamentals in their simplest terms,the way a street vendor selling fruit and vegetables might think about them, I believe that the concepts are easy enough to understand,for anyone interested in business.

Therefore :

Revenue is the amount of money that comes into a company from the sale of its products or services.For a street vendor it is the money he collects from selling his fruits and vegetables.

Profit is the money left after deducting the cost of those goods.

Profit margin, is the money you get to keep as a percentage of total revenues.                        
Sales – $150
Cost  – $135
Profit – $15
Margin – 10 % ( $150-$135 = $15 , $15/$150 = 10 %)

Any business is started with an intention to make money (excluding e commerce of course) which can be expressed as the Profit Margin Target.

The street vendor makes many decisions during the day to achieve his profit margin goal,beginning early in the morning when he decides how much fruit to buy and what to pay for it.This is his sourcing strategy.

Should he buy one variety or several ?This is the Product Mix.

He sets up his cart and decides how to price the fruit as it will affect his margin.This is his Pricing Strategy.

The way he arranges them on the cart to attract customers is his Merchandising Planogram .

During the day he takes some tough trade off decisions about what price cuts he should make to unload his inventory so he ends the day with enough cash to buy merchandise tomorrow.These are Mark downs. Sometimes he may also decide to make less money per transaction but increase the number of transactions. Lowering the price can collate the demand in his favor.Just as street vendors need cash,so do companies.A dwindling cash flow from operations can get them into trouble even if the financial statements show a handsome profit.

He learns to make these decisions through trial and error therefore the clearer his view of his customers,the better his decisions will be. He also gives more importance to his loyal customers than others.We call it Consumer Behaviour or CRM and now customer value management ! The BS never stops. Does it ?

The next fundamental that concerns the business is Velocity,what some people call asset turns.

Assets often include buildings,equipment,computers,receivables and inventory.

Velocity is how much annual revenue the company generates for each $ it has invested in assets.

Annual sales  – $ 1 billion, Assets – $ 100 million,  Therefore Velocity = 10

For a retailer if Revenue $700 million, Average Inventory – $100 million, Velocity is – 7. Velocity 7 is quite good in retailing.

Margin and velocity can be combined into one measure that most investors use to assess a business,its called Return on Investment(ROI).

ROI – Margin X Velocity. It is GMROI for retailers.

Retailing ( we are talking about a street vendor selling F & V) is a low margin,high velocity business. A retailer may have a 3 % margin but a velocity of 7 will yield a respectable return of 21 %.If you put the same money in bank the max that you can get is 9 %. That’s why you are doing the business else you will just put the money in bank with zero risk.

Let's look at growth.A growth that sacrifices margin for revenue is not desirable.A real growth is the one in which the revenue as well as the margins grow together. But today company's are compromising margin to expand market share. What they miss out is that a market that has been built on the premise of discounts and unsustainable low prices will vanish as soon as the terms of trade are unfavorable. If you get customers because of price you will lose them because of price. And there is always someone out there with lower costs than you willing to undercut on price.

Finally we will talk about the most important entity – the customers.A growing market share shows that customers are choosing your product over your competitors in increasing numbers every day.

So if you are growing your share of the market, in a market, that is by itself growing then it is a great position to be in. So if Smartphone market is growing by 30 % and your share has doubled from 10 % to 20 % from last year it is exciting and you are doing something right for your customers.

But if your market share is growing in a market that is on a free fall For example : Music CD’s or Aim and shoot cameras then it simply means that your competition has moved to greener pastures and you are left to tow away the burden. This is also called the Bozo Quadrant by Guy Kawasaki.

Bear in mind that business acumen is not a matter of being able to calculate numbers to the 9th decimal place but about being customer centric,focused and intelligent.

Trial and error are called insights from Consumer behavior in marketing meetings. There is this famous quote - I know half of my marketing budget is a waste. Problem is I don't know which half ?

The customer does not give a damn if you are able to  map the pschycographic mindscape of purchase decisions executed in a competitive environment by measuring the dynamics of inter relationship between product and price but are not able to provide what she wants,when she wants it and at a price she is happy to pay you.

Paralysis by analysis is a favorite game played by bored corporate citizens where graphs and charts are interpreted not on the basis of what they are telling but on the basis of what is convenient for those who are driving the meeting and the company. The fact is that if you have two 5 rupee coins and you keep counting them till the clock strikes 6 PM,they will still add up to 10 rupees only.You can  make them 20 rupees by doing something about it – not by sitting in a meeting with colleagues who are equally confused and by beating each other on your knowledge of latest terms that are trending at Harvard or Stanford.

Ralph Waldo Emerson said : Common sense is genius in a workman's clothing.

I could not agree more with him.

Get real folks. It feels good.