Too many companies are obsessed with their profit and loss reports. It hasn’t occurred to them that they might be looking at the wrong numbers. Let’s examine some factors that might have a bigger impact on profit and loss.

 Reduce total cost to the customer. A forklift distributor in Los Angeles, who sells and services forklifts to national companies like Home Depot, among others, has adopted this strategy. A customer’s forklift operator had run his lift into a post, damaging the lift cage. The cage was severely bent. The normal action by the technician responding to the call would have been to order a new cage. The cost of this part is substantial, not to mention the labor required to remove the damaged cage and install a new one.

Instead, the technician, without consulting with his manager, went to an auto parts store and purchased a hydraulic jack for $200 with his own money. The technician figured he could use the power jack to return the bent frame of the cage to its original condition. His action saved the customer a large sum of money. This will have a huge impact in increasing customer loyalty in the future. When a business shows this kind of initiative, customers will spread the PWOM (positive word-of-mouth), which can also contribute to an increase in sales for the company.

 The cost of not training is greater than the cost of training. The huge investment has already been made. The cost of human capital, which includes salary, benefits, payroll tax, Social Security, etc., is usually the single biggest expense an organization has. But don’t forget about training. It’s this small investment that leverages the big investment that has already been made. A formula to plan your investment in training is:

Dollars invested in training (12 months) / gross salary = ___%

In other words, training is a percent of payroll. The average in this country has been .5 to 2 percent, which is fairly anemic. That number should be skyrocketing. Businesses that want to excel should target the 5 to 10 percent range.

 The cost of not weeding the garden. If you do not weed the garden of your poor performers, you will jeopardize losing your top performers, and the performance of the team will go down. When you finally weed the garden, employees will not only applaud your actions but also wonder what took you so long.

 PWOM (positive word-of-mouth). Everyone knows that positive word-of-mouth is the most effective form of advertising. Yet too often companies do not measure it. Look at this example:

 

Company A                          Company B

70%              PWOM            30%

30%           Paid Media         70%

If these two organizations were equals in revenue, Company B would have to have many more sales reps to get to the same level of revenue as Company A. Referrals from PWOM will close at a much higher rate than leads from paid media. The company may also spend more money writing proposals and using support staff time to help the reps as well as additional marketing materials, etc. Every organization wants referrals but amazingly few track it.

Small businesses that want to generate more referrals should include PWOM in their strategic planning discussions. They should set a goal for what percentage of their business should come from PWOM. They can also target the number of new accounts they want from PWOM. Setting goals and tracking PWOM should be included as a number to review in monthly management meetings.

 The lifetime value of a customer. When you lose a customer, you’re not just losing a single order. You are losing the revenue from that account for a lifetime. However, it doesn’t stop there. Most businesses fail to calculate the additional financial impact. If customers are frustrated or irate, they will spread NWOM (negative word-of-mouth.) The lack of having a PWOM strategy in place means you will also lose the revenue generated had you turned this negative situation into a success for the customer.

Repeat customers. This is one more financial number that is probably not on your P & L statement.

Company A                                             Company B

70%                 Repeat Customers            30%

30%                   New Accounts                70%

It has been said numerous times that the cost of acquiring a new account is far greater than the cost of keeping current customers. If that’s the case and the two companies above are equals in revenue, Company A will come out on top in profits, thanks to its wealth of repeat customers.

DIGGING DEEPER

Why is it then that so many companies focus on standard financial statements and rarely take a hard look at these other factors? Part of the reason is that general accounting principles categorize expenses and revenue into the traditional account numbers that permeate every company’s financial statements. It takes some out-of-the-box thinking to consider the non-P & L financials.