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The #1 Key to Profitable Growth

One of the advantages of accounting and consulting work is intimate access to properly filtered private company data.  We regularly do research on the aggregated data of our consulting clients, and when we recently graded our Top 125 clients on their business performance, we hit upon a startling observation.

We categorized the 125 businesses into 5 groups:

  1. Profitably Growing – above 10% pre-tax profit and greater than 5% year over year growth
  2. Profitably Stable – above 10% pre-tax profit with +/- 5% year over year growth
  3. Cutting to get profitable – less than 10%, but above 0% pre-tax profit with the plan to get profitable with the work they have
  4. Need to grow to get profitable (Stage 1 denial) – less than 10%, but above 0% pre-tax profit with the plan to grow to get profitable
  5. Consuming muscle – less than 0% profit and consuming critical capital

We found that 25% of our consulting clients fit into the “Profitably Growing” group and 31% were in the “Profitably Stable” group.  As we searched for clues as to what typified the companies in each group, it was astonishing to see the answer jump out at us…

            “90% of the Profitably Growing companies had a Sales-Focused CEO”

When we looked at the “Profitably Stable” group, we found the opposite….

            “90% of the Profitably Stable companies had an Operations-Focused CEO”

Before all of you sales people say “I told you so,” I should point out that the Sales-Focused CEOs had to adapt their way of thinking to achieve this kind of growth. They had to add financial discipline to their tool bag to differentiate the good sales from the “swapping dollars” sales.  They sometimes had to accept a lower rate of growth to maintain profitability, which can go against their instincts.

Operations-Focused CEOs are effective to a point in sales, but they quickly tire of it and are constantly searching for the “experienced sales guy” that will take it off their hands.  They invariably hire the over-priced available person (if they were so good, why are they available?) and it turns into a 6 months to 2 years of organizational hell with persistent promises of better performance just around the corner.  All they end up with is a lot of wasted hard-earned capital and sometimes even worse conditions than when they started.  Now they have to go back to selling when that is the last thing they wanted to do.  Anybody heard that story before?

The bottom line is, we can teach Sales-Focused CEOs how to be reasonably disciplined in finance, even though they occasionally step into some manure that has to be cleaned up.  It is much harder to get Operations-Focused CEOs to build a sales team or learn to love sales.  The ones that learn to love sales achieve it through marketing to drive qualified leads to them, so it diminishes the “sales” part of the process.  Some have been successful in approaching sales from an operational process standpoint.  This appears to be the most promising but I do not have enough data points to find a successful repeating pattern.  The good news is they are profitably stable so they can stay in the game, build wealth, and have some funds to do some research and development on a process that works without betting the whole company.

If your company doesn’t fall into one of the first two groups of “Profitably Growing” and “Profitably Stable,” stay tuned as I will write on those in coming blog posts.