MARKETING MATTERSCEO JOURNAL
Live Within Your Means A
DAN MARCUS, TDC CONSULTING INC., AMHERST, WISCONSIN
guy I know is too smart for his own good. And for his company’s good too. He’s
so smart that he just can’t believe it when I tell him that consistently earning double-digit pretax profit is not only possible but simple; it’s merely a matter of keeping his company’s costs sufficiently below its revenues, and of being enough in control to do so over time as rev- enues cycle up and down. In other words, it’s as simple as learning to live within one’s means. CEOs would do well to heed the
old-school wisdom in this adage. To me it means that leaders must consis- tently make decisions and act in ways which keep expenditures sufficiently below revenues so as to generate superior profitability month after month and year after year. Simple, right? One can measure management’s commit- ment to living within its means by analyzing the ratios of cost of goods sold (COGS) and sell- ing, general, and administrative expenses (SG&A) to net sales. By the time metalcasters need a turnaround and call me, COGS is invariably greater than 95% of net sales. A few even had COGS greater than 100% of sales! Living within one’s means suggests that a good COGS target (depend- ing on which market segments your business serves) is between 78% and 85% of net sales. If operating costs including inventory changes are much higher than that, there won’t be enough “means” left over to cover SG&A expenses and to clear double- digit pretax profits. A reasonable SG&A target is 5-7% of net sales. That said, the leanest of my clients spends less than 5% on SG&A, which is a worthy goal for all. If profits are much below 10% pre- tax, benchmarking the major compo-
nents of COGS and/or SG&A can pinpoint where spending is out of line. Tese data can then be used to get spending in control and catalyze a profit turnaround. Simple (there’s that word again) steps like these set CEOs on a path to fully realizing their business’s inherent profit mak- ing potential. While living within your means
is a very simple concept, making it happen is difficult, not least of all because profit-making isn’t an intel- lectual exercise requiring a fancy Ivy League education to work out—it is fundamentally a moral challenge. This truth is why, despite the fact
system and admit that the path they have been walking is the wrong one and they should turn back. In fact, and despite the fact that most metalcasting businesses have never earned double-digit profits, in over 35 years only one CEO not facing bankruptcy has admitted to me that he may be part of the problem. His words should be taken to heart by all CEOs: “We’re working too hard and have too little to show for it; there’s got to be a better way.” A second moral prerequisite to
Living within your means is a very simple concept, but making it happen is anything but easy.
that there are many highly intel- ligent people in the world, few busi- nesses achieve superior profitability, and much fewer do so sustainably over time. Leading a company to double-
digit profitability is all about moral imperatives like humility. In my experience, a CEO’s hubris is often at the root of poor business per- formance. This is especially so for CEOs who are also business owners, as they are used to getting their own way and are typically unwilling to acknowledge that their way might be at the heart of the profit-making problem. It’s an uncommon human being who can put aside his or her ego, parochial training, and belief
superior profitability is courage, beginning with the courage to admit that, while eminently possible, sus- tainable double-digit profitabil- ity is not attainable via the pre- vailing management approach. Beyond admitting a problem exists, courage is required to stand up to fear of change, mis- placed honor, entrenched inter- ests, and longstanding ideas and ways of doing business. And most of all courage is needed to act boldly and in new ways, inspire others to do the same and, perhaps for the first time in generations, actually begin to
live within one’s means. Both humility and courage are
lacking at my uber-smart friend’s company, and so his business lan- guishes, as it has for decades, in a state of middling profitability. And it’s not just his company; many that I know are in exactly the same boat—no matter what they do or how hard they try, pretax profitabil- ity, when there is any, remains stuck between 2% and 6% of net sales. All of these long-suffering metalcasters are proof that while living within one’s means may be simple, it is anything but easy.
Keep the conversation going. Reach the author at
tdcmetal@wi-net.com to comment on this or any CEO Journal column or to suggest future topics.
October 2014 MODERN CASTING | 45
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