Building a Moat: Part II
In Part I of this series we talked about what it means to have a “moat” around a business – and what that looks like from the perspective of those on the outside: customers, competitors, vendors, partners and even acquirers. Using a couple of industry examples, we highlighted how companies have improved their position in the longer term, even if it meant wrestling with some challenges.
A Culture of Discipline
“When you put two complementary forces together – a culture of discipline with an ethic of entrepreneurship – you get a magical alchemy of superior performance and sustained results.”
Jim Collins, Good to Great
In Part II, we flip the perspective and look more carefully at internal operations. Achieving operational excellence is rooted in the fundamentals, namely setting clear objectives and goals. Attentively tracking the core metrics – revenue, gross margin, profit margin—is key, but are those tied to goals and objectives within your company? Regularly assessing metrics can help uncover opportunities for performance improvements and supports a culture of discipline. While setting key performance indicators (KPIs), goals, and objectives may feel rigid and not “entrepreneurial”, it’s quite the opposite – it creates a consistent system while also giving people freedom and responsibility to achieve results.
Accounting is not just about taxes
Sure, getting things organized for tax returns is an important, if tedious job. Accurate statements show business performance. More importantly, solid financial processes, systems and controls provide owners, managers and outsiders with confidence as well as with a lot of very useful data for decision-making. Key uses include:
- Tracking margin trends; cash flow management, matching expenses to revenues, inventory management
- Running non-business expenses through the business, though common, muddies the picture for everyone and may need to be reversed for bank or acquirer presentations.
- Tracking sales is key; tracking sales plus margins by customer type, product, or service can help improve pricing strategies, product/service mix, and/or customer mix
Practical data – in practice!
Financial performance indicators provide a window into the business operations. KPIs can show managers what’s happening on the floor, in the warehouse, in the factory, in the field and how that connects into the financial picture. The key is to understand the most important drivers for your business, track those, and pay attention to how even minor tweaks to processes can improve performance.
A B2B food distributor consistently tracked its weekly and monthly sales numbers. The sales team regularly met and exceeded sales goals, yet margins remained thin. While the team understood the target margin for each category, they had not considered raising the target to provide negotiating room with customers, especially with seasonal high-demand, higher margin products. The team refined their metrics, including target margins, and within weeks, they delivered their best performance to date and generated sustainable margin improvement.
Team: energy, creativity and resilience
Numbers do not run a business. People do. Investing in the team, ensuring they have opportunities to grow, listening to their insights – paying attention to the people will benefit your business now and contribute to building that competitive advantage, or moat. Many smaller, owner-founded businesses rely on that one person to fill numerous critical jobs. Bringing on additional talent, especially in key sales and operating roles, strengthens the organization and adds resilience to the business model.
After many years of running a lean business, a CPG company recognized that without investing in talent, the company would face serious hurdles not only in pursuing growth, but also in establishing a well-run company. The founder and CEO brought on a COO, which gave the CEO more bandwidth to focus on product development and sales (her biggest strengths) and strengthened the company’s position as it expanded in retail stores across the U.S.
There is no “one way” in building a well-developed system. Start with what’s available, understand the skills and constraints of your team, and recognize the value of investing in people…the more you dig into the details, the more opportunities you’ll surface to strengthen your company’s competitive moat and improve its bottom line.
Jim Sowers, a FOCUS Managing Director located in Richmond, Virginia, has over 30 years of experience in investment banking and corporate finance. He specializes in the Food & Beverage, Government & Defense, and Business Services industries. To learn more, please contact Jim Sowers, Managing Director, at (804) 525-8541 or [email protected].