Profit per X and why implementing it early on in your business strategy is key to success.
From the very beginning of the conception of a business idea implementing a Profit per X early on can be key to your business success. How and why is what I discuss with Shannon Byrne Susko, the Founder & CEO of Metronome United, on my YouTube channel The Transition Guy. Susko is a big advocate of the Profit per X strategy formed by the American author, researcher and business consultant Jim Collins. He describes Profit per X in his ‘Good to Great’ book. He believes that a successful strategy is formed from overlapping these three questions.
1) What you are deeply passionate about (your ‘Why’)
2) what you can be best at in the world
3) what best drives your economic engine.
Profit per X doesn’t deal in numbers. The Profit per X of your business is your economic engine, your core business. You can use the Profit per X to measure your 10-30 year goal (BHAG). Shannon goes one step further, she says 3HAG is necessary when planning your BHAG. 3HAG is predicting your future growth in 3 years prior to the execution of your BHAG. It is a strategic execution system that drives confidence in predicting the future growth of your company and then makes it happen.
Back to Profit per X – how do we work it out?
Firstly you need to ascertain what the purpose of your business is. The BHAG and Profit per X are intrinsically linked. The 10 to 30 year goal you need to set comes out of the intersection of Jim Collins’ hedgehog concept. Ask yourself these questions to find your Profit per X first, prior to planning your 3HAG and then your BHAG. What is your core business and what is your understanding of what you can be best at in the world? Can you make money doing it – the economic engine? That will give you a clear Profit per X. This allows you to move forward to your 3HAG.
Planning your 3HAG
To plan your 3HAG you need to decide the year ending date fiscally three years from now. What’s the gross revenue you are going to do in that year? How much operating cash will be in the bank at the end of that year? What do you need to do to deliver these aims three years from now in order to make those numbers?
Next step is the key function flow map.
Prior to moving onto the BHAG sit down with your team and plan the key function flow map. What are the functional roles that exist in your business today? An example of a functional role is: head of company, sales, marketing, manufacturing, development, finance. What are the three to five key functions in your business that actually make the company money? What functions generate your economic engine. This is the foundation of everything in your business. And then we ascertain what non-fiscal things flow through your business. What do the individuals in your team control? Then we can see what things we need to make better, faster decisions about, to scale up the business and find our BHAG.
By setting out your plans this way, finding your Profit per X, your 3HAG, your key function flow map and then finally your BHAG, you create confidence within your team. They can see the flow and aims of the business clearly mapped out for them. They can get excited about the growth of the business. It becomes collaborative and creates a sense of ownership within the team.
It’s important to check back in on your Profit per X regularly. I advise clients to do it every 90 days. A check in, not a reworking of it. The hard work has been done at the beginning. For some high growth businesses a quarter can feel like a year so it is important to check in on your original Profit per X to ensure it’s still working for you. Businesses constantly evolve and it’s important to go with that and not remain static.
If you want to speak to me about Profit per X, head over to the contact me page.
And remember, failing to learn is learning to fail.