Could the complexity of business be reduced down into a simple equation? I believe it could. Before I explain why I believe that, I’d like to ensure I don’t lose anyone who works in a non-profit, not-for-profit, government job or within education — private or public. NEWSFLASH: all organizations are FOR PROFIT and all organizations are IN BUSINESS. Every entity wants to make sure its income exceeds its expenses — that’s what we call a “profit”. A charitable organization, a municipality or university won’t be around for long if its income is not greater than its expenses.
I believe that the complexity of business can be reduced into this equation: Margin x Velocity x People.
Lets break that down a little further. Margin is how much you make after expenses. I’m specifically talking about Net Margin (aka Net Income, aka Net Profit). So, Net Margin is how much you make which can be expressed as a %age or in dollars. Velocity means speed, productivity or utilization. If you’re a manufacturing business, velocity can be measured in the speed at which raw materials are converted into work-in-progress and then into finished goods and then sold. We’re then not done, as we have to collect the receivable as quickly as possible. If we’re a retailer its the ability to move inventory fast. If we’re a service business, its the ability to utilize labor and other assets (such as technology and real estate) in the most efficient and effective manner possible.
Margin and Velocity cannot be optimized without People. Having a fully engaged workforce that’s firing on all six cylinders will do wonders to Margin and Velocity. In fact, if either of these three elements is failing, results are sub-optimal. Think about it — if there’s a suppression on Margin because of competition or an outdated product or service, the Velocity (say volume of sales) will reduce. If Margin and Velocity are down, it can be hard to attract and retain high quality People.
Great organizations (regardless of entity type), are always trying to improve Margin, increase Velocity and fully engage People. I’m personally not big into tattoos but if I was, I think I’d have Margin x Velocity x People written over my heart. I think I’ll try the Henna version first and see if my wife likes it before I go with the Real Thing.