You Can’t Cut Your Way to Prosperity: 8 Powerful Financials that are Not in Your P&L Reports

By Howard Hyden

Too many organizations are obsessed with their profit and loss reports. It hasn’t occurred to them that they might be looking at the wrong numbers. Let’s look at some numbers that just might have a bigger impact on the profit and loss, then some of the numbers that are on the reports.

1. Increase the customer sales: what could happen if you were more passionate about increasing the volume of your customer sales as opposed to your number of sales. The president of a company in Utah sponsored educational sessions for his customers to bring them tools and knowledge that would help them grow their own business. His theory was that if he focuses on helping them grow their own business, then his company would grow their business as a result.

2. Reduce the total cost to the customer: A forklift distributor in Los Angeles, who sells and services forklifts to Lowe's, Home Depot, and Costco among others, has adopted this strategy.  A customer's forklift operator had run his/her lift into a post, damaging the lift cage.  The cage part of the lift was severely bent.  The normal action by the technician responding to the call would have been to order a new cage.  The cost of this part is substantial, not to mention the labor required to remove the damaged component and install a new one. The technician assigned to this customer, without consulting with his manager, went to an auto parts store and purchased a hydraulic jack for $200.00 with his own money.  The technician figured he could use the power jack to straighten the bent frame of the cage and return it to its original condition.  His action was effective, and having saved his customer a large sum of money, will certainly have a huge impact to increase customer loyalty in the future. When these technicians show this kind of initiative, it is a fairly safe assumption that customers will spread the P.W.O.M. (Positive Word of Mouth), which can also contribute to an increase in sales for the company.

3. The cost of not training is greater than the cost of training: The huge investment has already been made. The cost of human capital, which includes salary, benefits, payroll tax and social security etc., is usually the single biggest expense an organization has. Then they forget the missing piece, which is training. It’s the small investment in training that leverages the big investment that has already been made. A formula to plan your investment in training is:

Dollars invested in training (12 months) divided by the gross salary =  _________% In other words training as a percent of payroll. The average in the United States has been 1/2-2% which is fairly anemic. That number should be skyrocketing. Organizations that want to excel should target in the 5-10% range.

4. The cost of not weeding the garden:If you do not weed the garden of your poor performers, you will jeopardize losing your top performers and the performance of the team will go down. When you finally weed the garden, the employees will not only applaud your actions but also wonder what took you so long.

 5.The cost of turnover is far greater that most managers realize. Here is a formula to calculate the cost of turnover.

Employee                  Annual

Position                    Income

Bookkeeper               $_______

Sales Rep                 $_______

Receptionist              $_______

Sub Total                  $_______  X7 = $_______ (Total Cost of Turnover)

The company that has higher turnover relative to the competitors will probably have lower customer satisfaction. Employee turnover begets customer turn over. Turnover is expensive!

6. P.W.O.M. (positive word of mouth) everyone knows that positive word-of-mouth is the most effective form of advertising. Yet too often companies do not measure it. Let’s look at the following example:

Company A                                      Company B

    70%                   P.W.O.M.                30%

    30%                   Paid Media               70%

If these two organizations were equals in revenue, company B would have to have many more sales reps to get to the same level of revenue as company A.  Referrals, which come from P.W.O.M., will close at a much higher rate than leads from paid media. Additionally the company may be spending more money writing proposals and using support staff time to help the reps as well as additional marketing materials, paid media etc. Every organization wants referrals yet it’s amazing how few track it. In addition, organizations that want to generate more referrals should include a P.W.O.M. in their strategic planning discussions so that they can develop the actual strategies and tactics that will result in P.W.O.M. They should set a goal as to what percentage of their business should come from P.W.O.M. They can also target the actual number of new accounts they want from P.W.O.M. Setting goals and tracking P.W.O.M. should be included as a number to review in the monthly management meeting.

7. The lifetime value of a customer: most organizations do not have an account number labeled “lifetime value of a customer.” When you lose a customer you’re not just losing sales volume for a single order. You are losing the revenue from that account for a lifetime which can be 25 years or greater. However it doesn’t stop there. Most organizations fail to calculate the additional financial impact. If the customer is frustrated or irate, they will be spreading N.W.O.M (Negative Word of Mouth.) The lack of having a P.W.O.M. strategy in place means that you will also lose the revenue from the P.W.O.M. that could be generated had you turned this negative situation into a success for the customer.

8. One more financial number that is probably not on your P&L is the one of repeat customers:

Company A                                           Company B

     70%               Repeat Customers            30%

     30%               New Accounts                  70%

It has been said numerous times that the cost of acquiring a new account is far greater than the cost of keeping current customers. Who is working harder on your accounts; your company to keep them, or the competitor to steal them? That might be a scary thought.

It is relatively easy to make a case that the above numbers will have a far greater impact on the sales and profit of a company than those numbers on the P&L. Why is it that so many companies focus on the standard financial statements and rarely look at the numbers above? Part of the reason is that General Accounting Principles categorize expenses in revenue into the traditional account numbers that permeate every company’s financial statements. It takes some out-of-the-box thinking to think of the non P&L financials above. Focusing on the above numbers just might have a bigger impact on the bottom line than the traditional numbers companies focus on.

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