by Dr. Jim Sellner
A friend of mine, Neville Joffe, tells the following story as he was frustrated that his employees did not understand that a five-million-dollar business (revenue) does NOT make five million dollars (profit).
Weirdly, many people do not understand this because they know their gross salary is not their take-home number.
Neville said his employees were skilled in the manufacturing process – not in finance, so he started teaching small groups of people why and how to improve profitability. Which he hoped they would understand would increase their job security as well as their pay.
He was not being effective, they were not getting it. He then tried something outrageous.
He withdrew $1,000 in small bills, crumpled them up, stuffed them into a bag. He called a town hall meeting. Standing in front of them he dumped the crumpled bills onto a table.
“This is called revenue.” Then, he placed a handful of cash in a bucket labeled “wages.”
Continuing the exercise with different buckets labeled “rent,” “maintenance,” “insurance,” = overhead or fixed costs, must be paid regularly.
Variable costs, “materials” etc. = cost to provide services or produce products.
He then started tearing up $20 bills* and throwing them into a bucket called “waste”, lost tools, damaged equipment, project overruns, re-dos.
People were stunned into silence when he tore up the bills.
“Why are you so surprised?” he asked. “You do this every day, but you just don’t see it.”
At the end of the demonstration, some cash remained on the table. He said, “What’s left lying on the table is called profit.”
Neville shifted some of the remaining cash towards the crowd and said, “this is for all of you for your hard work this year. The remainder is for the owners/shareholders in return for all the financial risk they take to support this business.”
The team was stunned. They finally understood the message he was trying to deliver. As a result of this eye-opening experience followed up with more information key financial metrics dramatically improved.
Inventory levels decreased, accounts receivables were collected faster because . . . we delivered what we promised, low margin products were eliminated, people stopped saying “yes” to every change to a project, because they understood the principle of contribution margin, unprofitable customers were let go, discounting and “special offers” decreased.
Over time, having created a culture of financial accountability with the right metrics, common language, and accountability, combined with wage increases and bonuses, the entire landscape of the business changed.
Equally important people were engaged and committed to the sustainability of the business for themselves.
In a nutshell – NO MARGIN, NO MISSION
*No real bills were harmed in this experiment.
