One number

The ‘One Number’ Approach to Business Growth: Balancing Sales & Resources

Where’s your profit?

£ Financials

Operations Sales & Marketing

1

number

Connects

3 critical

business areas

The ‘One Number’ Approach to Business Transformation

Value Added for the Critical Resource Limitation

= VA/CRL

Critical Resource Limitation

The ‘Critical Resource Limitation’ is the ONE thing that will put a brake on your growth!

Consider these examples:

• Football stadium• Racing circuit• Supermarket• Fast food outlet• Fine restaurant• Whisky bottler

• Hairdresser• Machine shop• Antique clocks• Professional services• Office supplies• Your business ??? (If

everything is working perfectly, what are you going to find it most difficult to get more of?)

£ Financials

Operations Sales & Marketing

1

number

Connects

3 critical

business areas

Critical Resource Limitation Connections

Critical Resource Limitation

Connecting to the CRL through the Break-Even Point

Connecting to the CRL through what we have to do in the market place to deliver on the target

Financial Link to the Critical Resource Limitation

The Break-Even point is that turnover figure that will result in a profit that exactly balances the overheads:

Break-Even Point =

OverheadsGross Margin %

But we don’t want to break even do we?

Financial Link to the Critical Resource Limitation

If Break-Even turnover is >90% of actual = then very high probability of failure

If Break-Even turnover is between 80 – 90% of actual then probable survival – but difficult to grow

If Break-Even turnover is <80% of actual then survival is likely and self-funded growth is possible

Critical Resource Constraint

The ‘Critical Resource Limitation’ is the ONE thing that will put a brake on your growth!

Consider these examples:

• Football stadium• Racing circuit• Supermarket• Fast food outlet• Fine restaurant• Whisky bottler

• Hairdresser• Machine shop• Antique clocks• Professional services• Office supplies• Your business ??? (If

everything is working perfectly, what are you going to find it most difficult to get more of?)

Dec 2007

Sales £350kCost of sales £258kGross profit 26% £ 92kOverheads £190kLOSS (£97K)

Value added/litre = £1.53(The critical resource was 60,000 litres of whisky

which made only £92,000)

Financial Link

Financial Link

1. Overheads = £190,0002. Critical Resource Limitation = 60,000 litres

Value Added to Break Even = ½£190,000

60,000 litres= £3.16

Value Added Target = £3.16/90% = £3.50

Financial Link

Old St. Andrews Whisky...

Added Value c £15.00 per Litre

TOTAL £900,000

If the break-even point was £3.15 where would YOU

focus….?!

CRITICAL RESOURCELIMITATION

60,000 litres of whisky


TOTAL: £60,000

Financial Link

Old St. Andrews Whisky...


TOTAL £900,000

If the break-even point was £3.15 where would YOU

focus….?!

CRITICAL RESOURCELIMITATION

60,000 litres of whisky


TOTAL: £60,000

Gross Margin was 26% in

BOTH cases!

Sales & Marketing Link to the Critical Resource Limitation

You are looking for PRODUCT and CUSTOMER

COMBINATIONS

That will maximise the Value Added for the Critical Resource Limitation

Sales & Marketing Link

Dynamic Pricing:

Litres % Resources VA/litre Gross Profit % Profit

Platinum 6,000 10% >£5.00 36,000£ 17%

Gold 12,000 20% £4.00 - £5.00 54,000£ 26%

Silver 24,000 40% £3.00 - £4.00 84,000£ 40%

Bronze 12,000 20% £2.00 - £3.00 30,000£ 14%

Lead 6,000 10% <£2.00 6,000£ 3%

60,000 210,000£

Average Value Added per Litre = 3.50£

Applying the Value Added per Critical Resource Limitation

Dec 2007

Sales £350kCost of sales £258kGross profit 26% £ 92kOverheads £190kLOSS (£98K)

Value added/litre = £1.53

Dec 2008

Sales £501kCost of sales £289kGross profit 42% £ 211kOverheads £161kProfit 10% £ 50k

Value added/litre = £2.69

Your World Example Workshop

• What does the P&L account look like?• Deal with false P&L/Balance sheet cost allocation• What is the Critical Resource Limitation and how

much of it is there• What is the break even point for the CRL?• What is the target value for the CRL?• Good job or bad job?

Sales/Profit/Break-EvenTracking Tools

£Sales GM% VA/L VA/L Av Litres Litres Rem £GP GP RemBudget Wk 3.50£ 1,200 4,200£ Order 1 400£ 25.0% 1.67£ 1.67£ 60 1,140 100£ 4,100£ Order 2 1,000£ 40.0% 40.00£ 7.14£ 10 1,130 400£ 3,700£ Order 3 2,000£ 50.0% 1.92£ 2.54£ 520 610 1,000£ 2,700£ Order 4 2,000£ 25.0% 2.50£ 2.53£ 200 410 500£ 2,200£ Order 5 1,500£ 45.0% 3.38£ 2.66£ 200 210 675£ 1,525£ Order 6 3,500£ 48.0% 18.67£ 3.63£ 90 120 1,680£ 155-£ Order 7 400£ 70.0% 7.00£ 3.33£ 40 80 280£ 435-£ Order 8 100£ 30.0% 1.00£ 3.11£ 30 50 30£ 465-£ Order 9Order 10

Will it work in the construction industry?:

MHS Homes Construction Division turning over £10m a year and losing £120k per month for last 15 months– July – September introduction of the ‘One Number’

approach– October PROFIT £40K for the month– Following year PROFIT £350K– Last year PROFIT £800K

‘I was astonished... This was the fastest and most complete transformation from loss making to

profitability that I have ever seen’ Ashley West (Non-Executive Director MHS)

5 Steps to Business Transformation:

1. Determine your Critical Resource Limitation2. Establish your TRUE overhead3. Work out your Break-Even and Target Value Added

for your Critical Resource Limitation4. Figure out your CUSTOMER x PRODUCT marketing

COMBINATIONS to maximise VA/CRL5. Flex pricing & track progress

One Rule: Maximise the Value Added for your Critical Resource Limitation in everything you do!

5 Steps to Business Transformation:

If You Only Take AwayOne Thing From Today...

The key to increasing profitability and relaxing the organisation is:

NOT Gross Margin %But

Maximising the Value Added for the Critical Resource Limitation!

That’s all folks…

Bob Gorton

[email protected]

01474 872152

HARD HAT Business AdviceThe Enterprise Centre, 55 Redhill Wood

New Ash Green, Longfield, Kent DA3 8QP

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