Manage from a Single Piece of Paper

Robert L. Marcotte invests in small private companies. Lots of them - $4 billion worth since 19981. What does he look for? Great managers.

How does he assess the quality of the manager (typically the business owner)? He simply asks:

"What four or five things do you look at, daily or weekly, that are critical to the ongoing success of the business?"

Great managers, he says, can answer this question immediately. They know exactly where their company "is" based on four or five key indicators. They also are constantly aware of where the business has come from and where it appears to be going. The indicators are also levers that must be pulled to enhance performance.

Would you pass Mr. Marcotte's test? Would he immediately conclude that you're a great manager?

Gary Sutton, legendary turnaround expert and author of The Six Month Fix, urges all business owners to "manage from a single piece of paper." He says, "You can run a business with financial statements, but that's like standing on the stern and telling the captain how many rocks you just missed."

Marcotte agrees. Financial statements tell you about the past - and include limited information at that. Sutton suggests we monitor information that looks ahead, such as:

• Inbound calls/responses by source (e.g., referrals, ad campaign 1, ad campaign 2, marketing program A, marketing program B, etc.)
• Orders received (units and gross profit, by product and/or product line)
• Orders shipped (units and gross profit, by product and/or product line)
• Orders received but not yet shipped (units, revenue, gross profit, and estimated ship dates)
• Cancellations (number of orders, units and gross profit)
• Returns and/or warranty claims (number of units by product)
• Total gross profit
• Total gross profit margin
• Payroll expense (regular, overtime, temporary and total - and each as a percentage of gross profit)
• Accounts receivable (total dollars, total dollars as a percentage of annual revenue, and past due accounts)
• Product development status (When will your future "winners" be ready?)

In addition to the 11 items suggested by Gary Sutton and listed above, include a breakdown of costs by expense category (see Ken VanTreese sidebar). Include both fixed and variable costs, and label each as one or the other. Next to each raw number, add percentage of revenue taken by each. Here's the checklist item:

• Expenses by category, each coded as fixed or variable (dollars and percentage of revenue)

Next, let's add liquidity data, inventory data and data a little more upstream in the sales cycle:

• Cash on hand
• Credit available (add expiration data of current facility)
• Inventory (total dollars, total dollars as percentage of cost of goods sold)
• Number of new quotes issued (or bids, contracts or agreements - for the past week)
• Quotes eliminated (or bids, contracts, pending agreement, etc.)
• Total quotes outstanding (or bids, contracts, agreements, etc.)

Now this is a great one-page data sheet. Have this delivered to your desk once a week and you'll be empowered with the information you need to do your job - and do it well. But before Mr. Marcotte will give you an "A" grade, you'll need to answer a second question:

"What are your incremental economics?"

Similar to his first question, the answer will depend on your particular business. But this one is a little trickier. What he means is, what is the profit that you earn on each additional sale? Of course, you'll know this because it's already on your data sheet. Mr. Marcotte wants to know because he knows that once a business has hit its breakeven point, every dollar of gross profit falls to the bottom line. So you better know your breakeven point in units and dollars (per week, month, quarter and year).

But Mr. Marcotte also wants to know if you are in touch with the profit profile for each of your profit engines. To identify your profit engine, ask yourself, "Where do our revenues come from?" Sales people? Web site listings? Store locations? Product lines? Departments?"

Whatever is a profit-generating engine for your business, you should track and monitor the performance of each. That is, the current and cumulative revenue, expense and profit. For example, if you have several sales people, track the performance of each and compare them against each other. If you have several locations, direct mail campaigns or products, do the same for each.

Here are our final data sheet items:

• Breakeven point (dollars over/under)
• Performance of each profit engine (revenue, expense and profit by month and since inception)

Does this sound empowering? Of course it does. You should do it. Every business owner should. Have your in-house financial person prepare and deliver each week your own one-pager. If that person is you, it's time to find someone else to do the bookkeeping. Your time is better spent on marketing, sales or product development. Or maybe you should quit working so hard.

Note: Following is a sample one-page report for a newsletter business.

1    Robert L. Marcotte is Managing Partner of MCG Capital. The investments mentioned here are investments made by MCG Capital.