Paul Butler | The seven components of business – Santa Clarita Valley Signal

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I believe these seven components are interdependent and can actually provide a much more balanced, healthy and sustainable scoreboard to measure an organization’s success.

Customer

We have to start with the customer. It’s almost as if the customer is the trunk of the tree and the other six components are just the fruit that falls from the tree when we serve our customers well. Of course, organizations sometimes call their customers, “clients” or “students” or even, “colleagues” as we have internal customers as well as external customers.

I’d suggest there are three levels of service we provide to our customers — satisfy, exceed and anticipate. At best, we must anticipate our customer needs.

In my mind, components 2-5 are explicitly inside the businesses — they’re really internal measures of how well we’re serving our customers and how well we’re managing the organization.

Cash flow

We know there are three types of cash flows — operating, investing and financing. We know that cash flows both ways and that we need positive cash flows. We must have more coming in than going out. Remember, an outflow of cash under investing activities is not a bad move as we may sell that investment at some point in the future for more than we paid for it.

Profit

We know there are three levels of profit if we’re a manufacturing or retail business. Those three are gross, operating and net profit. Service businesses don’t calculate gross profit as they don’t have a cost of goods sold. Whereas manufacturing creates products to sell, retailers just sell those products, which they call inventory. A service business essentially sells time.

We must ensure we have profitable relationships with our customers — meaning the income we derive from serving them with products and services is greater than the expenses used in the process, else we won’t be in business much longer.

Productivity

Productivity is also an internal measure that your customer only cares about when it impacts them — for example, how quickly they receive your product or service from the moment they place the order. Productivity is measured in a myriad of ways depending on the organization, but essentially, I’ve found there’s always a numerator and a denominator. The business is attempting to measure inputs to outputs.

Growth

Growth is most commonly measured as top-line growth (i.e. revenue growth); bottom-line growth (i.e. net profit growth) and earnings per share growth (most commonly for publicly traded companies) but remember privately held companies, too, can have a notional calculation of an earnings per share.

If we’re not growing in today’s highly competitive and global marketplace, we’re actually going backward in real terms. Our customers want us to grow. Our investors expect growth. Our employees are more engaged when we’re growing.

Teams

We’ve all heard the phrase, “Money makes the world go around,” and yet I believe, “Teams make all of this go around.”

It’s teams of people working effectively and efficiently together, who serve the customers (and each other, as internal customers). It’s teams of people who help make the cash flow positive and who help to make the enterprise profitable. People are often the numerator within productivity measurements and people are crucial to help ensure we’re growing.

Community

Community can be defined in many ways, but basically, it’s the concept of giving back. I’m no philosopher but I’ve read enough and seen enough to realize that organizations that do well over time give back to others. My word of caution here is to choose a cause (or causes) that is acceptable to all the organization and avoid the risk of getting behind a political or social cause that may mean a lot to some but not to others.

In summary, I have found these seven components can provide a much more balanced scorecard for measuring an organization’s success rather than just the bottom line of net profit. I have seen how these seven components can sustain success over time. I’d suggest four of the measurements are primarily internal measurements; (cash flow, profit, productivity and growth) whereas two are primarily external (customers and community) and that ultimately it’s teams of people who make this all happen.

Paul Butler is a Santa Clarita resident and a client partner with Newleaf Training and Development of Valencia (newleaftd.com). The views and opinions expressed in this article are those of the author and do not necessarily represent those of The Signal newspaper. For questions or comments, email Butler at [email protected]

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