Margin x Velocity x People

Remember, every organization is really in business.

In sports, they’ll often talk of an MVP (‘Most Valuable Player’). The letters M.V.P. make me think of an equation that can help us reduce the complexity of all organizations into a simple equation and that is Margin x Velocity x People.

Lets break that down a little further.

Margin is how much you make after all expenses. This is the bottom line after deducting all expenses. Net Margin is expressed as a percentage or in dollars.

Whereas Margin is how much you make, Velocity is how many times you make it. Velocity is a phrase in business we don’t often hear but it can be expressed as speed, productivity, optimization or utilization.

If you’re a manufacturing business, velocity can be measured at the speed in which raw material is converted into work-in-progress and then into finished goods and then sold.

If you’re a retailer, its the ability to move inventory fast.

Remember, raw materials, work-in-progress, finished goods (aka inventory for a retailer) ties up cash and heightens the risk of obsolescence, damage or theft, the longer an organization holds onto it.

If you’re a service business, it’s the ability to utilize labor in the most efficient and effective manner possible. You’ll often hear leaders of service businesses say that “People are our greatest asset.” Well, people are not technically assets from an accounting perspective (they’re really expenses and any future obligations connected to them, such as pensions are really liabilities) but we appreciate the rhetoric. Service businesses are utilizing human resources to produce organizational results.

Ideally of course, organizations want to be in the business of HIGH margin and HIGH velocity whereas most business lean one way or another. Some are HIGH margin, LOWER velocity (and that’s part of their brand prestige), whereas some businesses are HIGH velocity and relatively LOW margin.

Margin and Velocity are optimized by People. It’s People who produce Margin and Velocity.

Having a fully engaged workforce optimizes Margin and Velocity. 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Think about it — if there’s a suppression on Margin because of competition or an outdated product or service, the Velocity, (say volume of sales) will reduce.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. If the morale of People is down, Velocity and Margin will suffer.

Great organizations (regardless of entity type), are always trying to improve Margin, increase Velocity and fully engage People.

When it comes to the People part of the equation, organizations need to be reminded that the glue that bonds people together is trust. Trust is character and competence. Character is who you ARE and competence is what you DO. If you’re a colleague or leader of HIGH character and HIGH competence, people will trust you. If you’re not…not so much.

So, MVP may mean ‘Most Valuable Player’ in sports but in the sport of business, I believe its a good way of us remembering that all organizations are in business and that the complexity of commerce can be distilled down into an equation which we call, Margin x Velocity x 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 Gaynor likes it before I go with the real thing.

I encourage you over the next few days after reading this to consider the organizations you interact with as a vendor or customer. Ask yourself how you can relate ‘Margin x Velocity x People’ to their money-making model. Would you say they’re HIGH Margin and HIGH Velocity? Or, are they HIGH Velocity and LOWER Margin? How engaged do you think their People are? If it was your business, (or if it IS your business), what would be a few actions you would or could do, to improve ‘Margin x Velocity x People’?

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