If you think of your business like a car with an internal combustion engine, you need to be operating at an Air to Fuel Ratio (AFR) of 5:1 where air is sales and fuel is profit. An AFR of 5:1 is equivalent to 20% profit. I can already hear some of you saying “in my industry that’s not possible, on average we run on 5% margins (or some other low number).
Let’s challenge that thinking. First, if that’s true, and there is NOTHING that can be done about it, take your capital and invest it in the stock market where you can get 9.8% on average investing in indexes. Granted, return on sales (ROS) and return on invested capital (ROIC) are not the same thing, but unless you have very little invested capital, 5% ROS is not much like 10% ROIC.
But before you do that, challenge what your industry is capable of. If the average really is 5%, there are probably high performers and low performers. What do the high performers do differently and can you become one of them? Is there anything you can do to richen the mix and get more fuel in? We have clients in under-performing industries that occupy the first quartile of performance and in one case, probably the best in class position. Someone has to be best… why not you? It may be easier than you think if you look closely. Herd mentality runs rampant in under-performing industries and markets and those that can “think different” often experience different (read that better than average) performance.
Remember the adage; “Margin thrills and revenue kills”. You want your business engine to operate at its stoich level where you get optimal burn from the resources you put into it.