How the Profit Flywheel Accelerates Your Business

This is the 12Faces structured roadmap to growing your business. We use the flywheel to explain the structure of the material. It is one of many possible roadmaps to growth. Use it as a suggestion tool to incorporate into your business planning. Yellow Belt

Profit Flywheel Introduction

Are you undertaking improvements to your business aiming for growth in Profit?

Are you moving from a slow or no growth business environment into a growth environment?

• If you are not using a systematic approach for this, it can be a challenge.

As this is not something you do regularly, you may not be too sure how to go about spinning up your growth.

The systematic outline below will help you with a framework for growth. Tune it to suit your circumstances.

Considerations:

The bigger your business the more moving parts (people) you need to get into motion.

• Get them focused in the single direction you choose.
• People are a critical aspect of managing change.

Go to the Diagnostic Menu – Human Resource Structure.
In particular the article on Change Management for Profit.

Assumptions:

• Your business will grow Revenue to grow Profit.
• You have used the optimising processes discussed in “Optimise100: Streamline My Existing Operation”.

There is no point beginning to grow a business that has not been optimised.

• All you will do is grow the inefficiencies and waste in the present system along with the “meat” of your business.
• This will drain human and other resources for no purpose.
• You will need to remove these inefficiencies and waste at some future date.

Slow and Steady Acceleration: 3 Concepts

Putting your foot flat to the floor boards when driving a car might be a spectacular event but can lead to disaster if you lose control.

It is the same when you are beginning a Growth Cycle in your business.

Do you jump in with all guns blazing?

• It is better to gradually accelerate your entire business.
• It will work in harmony and for a common set of targets.

This acceleration process is a well-known problem in management.
Several different approaches have evolved but they all have the same general principles.

1.Flywheel

Jim Collins in his “Good to Great” series of books, refers to the “Flywheel Effect”.
He uses the analogy of a massive Flywheel that is sitting stationary.

What is a Flywheel?

• It is an ancient device used in association with machinery.
• It smooths out the effect of variations in load on the machines. These would otherwise cause fluctuations.
• Any fluctuation in a production line can lead to poor quality and unexpected events.

We use the analogy here in a business sense.

• When you are growing your business, all sorts of fluctuations will happen in the various elements of your business (such as Sales, Production, Accounting etc.).
• A smoothly accelerating Flywheel will reduce the impact of such fluctuations.

Assumption:

• Profit of your existing business is not growing.
• Therefore the Profit Flywheel is stationary.

The aim is to gradually get it to spin.

• The early stages take the most effort.
• Once spinning, the Flywheel will spin faster and faster.
• This is without doubling the amount of effort each time.
• And so it is with the Grow365 Flywheel!

Go to the article: Go: How to Execute Your Double Profit Strategy.

2. Nautilus Shell

A second illustration of the concept of slow and steady growth comes from nature.

• The sea snail that inhabits this shell gradually expands their domicile in a spiral. 
• The spiral steadily increases in width as the snail grows.
• In the image above, you can see how it started out small and incrementally added extensions to its ‘house’.

This is a very apt illustration of how you can grow your business in steady increments.

3. Kaizen

Toyota’s “Kaizen” concept is another demonstration of slow and steady business growth acceleration.
Kaizen means steady, incremental, improvement.

• Start with small steps so that it is not a challenge for people to make the change.
• If the change has problems, the step has not been very big and can be rectified or reversed.

Go to the Article: Kaizen Leads to Continuous Incremental Improvement.

Take away

Start small and take time to spin up to full speed using a controlled approach.

This minimises:

• The adverse effects and risk of change.
• The resistance from staff who may struggle with accepting workplace changes.

Challenge:

To accelerate at a speed that is not so fast that you lose control but not so slow that little happens.

Where Do Your Skills Lie?

Do you have some management experience?

You may be familiar with the matrix:

If you are, “fast forward” over subject matter that you are comfortable with.
But
Keep in mind there might be some “don’t know/ don’t know” holes in your knowledge.

Moving Forward On All Fronts Simultaneously

No single function of the business can create the required level of growth by itself.
All parts of the business need to work in unison and simultaneously.

There must be:

• A balanced approach with all the various parts of your business accelerating in unison.
• No one part speeding up past the ability of the other parts of your business to service it.

Alternatively, you do not want a part of the business to be operating at a lower tempo than the others, thereby holding up improvement in general.

In any business, no matter what size it is, you are going to have several elements that need to work in unison to get your Flywheel spinning.

These are:

• Plan/Dream It: think up the products and methods of obtaining the goal (innovation and planning).
• Sell It: set up sales for the products that you have dreamed up (sales & marketing).
• Get it/Make It: either manufacture yourself or buy in from a wholesaler the products that you have decided to sell and which your sales team have orders for.
• Distribute It: distribute the materials that you have produced to sales orders.

Plan for each of these when building your changes for the future.

Is your business small?
Do these plans yourself.

Is your business larger with Department Heads under each of these headings?
Appoint a Senior Executive team to get the parts working in unison across the company.
Appoint subsidiary teams to work the growth plans on a Departmental basis.

Go to the 12Faces: Start Diagnostic Menu select the area that best fits your dream.

Like any undertaking, there will be setbacks and other unexpected events.
One of the main functions of a flywheel is to smooth out variation in the load it is attached to.
It will provide enough momentum to get the process through the tough spot without losing much momentum.  

Secondary Support Subsystems

Accounting, HR and IT:

• Literally supply “support” to the primary systems of the business so that the business gets timely feedback:
  • Go to: Metrics for Profit
• Supply the necessary human resources to operate.
• Contribute little directly to profit.
  
• In fact, they decrease profit by consuming money to provide the service.

In many organisations, the accounting element of the business can be one of the major policy constraints in the business. 
By insisting on various policies, the accounting function can slow down the profit growth of the business.

Secondary supporting systems:

• Can be tuned to make a very productive contribution to the smooth running of your Flywheel. 
• Should not be expanded until it becomes a constraint on the further growth of the business.
  • This is likely to be much less often than you might expect. 

The onus should be on any manager who wants more resources allocated to secondary functions to prove that they have become a constraint.
Remember Parkinson’s Law says that “work will expand the time available”.
Go to the article: Parkinson’s Law

Timeframes

The following sets a frame work for your acceleration process.

Years

12 months:

• A convenient measuring period for plans and budgets.
• It coincides with the annual reporting.
• The start can be anytime during the year.
• The first year would be a part year to align with the Financial Year.

Quarters

4 quarters, 3 months each:

• Introduce a manageable time frame for each of your steps.
• Gives enough time to make progress.
• If something goes wrong, due to a change in conditions or a mistake, there is not much to undo. 

Is your industry affected by seasonality?

• Work on quarters tied to the seasons.
• Apply change in each season to the same period last year so that you are comparing “like with like”.

Allow for your process of slowly spinning the business up to full speed (100%) over the course of 12 months.

Set steadily increasing targets for quarters:

• 10% improvement in quarter 1.
• 20% in quarter 2.
• 30% in quarter 3.
• 40% in the last quarter.

The expected improvement in each quarter is manageable:

• As you gain experience, an increase in the speed in which you create and manage change increases.
• Your level of confidence increases knowing the direction and activity that you are taking is working.
• If something goes wrong in the first 10% quarter it is easy to unwind what you have done to rectify the problem.
  • Starting out with a full 25% improvement (100% divided by 4 quarters) in the first quarter is taking a lot more risk.
• As you begin to accelerate the growth rate, you will have ironed out the work flow issues.
• The team will have become more experienced and more engaged.
  • Starting with a small 10% increment or 3.3% per month, doesn’t look too threatening to anybody.
• Your reflection on the quarter past, will suggest what should happen in the next quarter.

Change What

Goals:

• To determine what you want to change in each of the existing processes to get the growth that you want.
• To maximise the impact of that change to get the greatest improvement as fast and smooth as possible.
• To have the Departmental plans interlocked across the entire Company.

This section addresses these goals. 

Focus on Maximum Impact

At any level in any business we know that there will be at least 2 major forces at work.

These are the 80/20 Rule and the Theory of Constraint (TOC)

Not familiar with these?

Go to the Diagnostic Menus:

80/20 Rule Menu
TOC Menu 

1. The 80/20 Rule says that 20% of things will make the biggest impact on your business.

• Spend time identifying what the 20% are.
• Spend your scarce time, financial and human resources on these.

2. The Theory of Constraints shows the overwhelming impact that the (usually) one constraint in your business will have on the productivity of your business.

• Work out the constraints in each of your systems that contribute to your profit goal:
  • Example:
  • Distribution, Sales, Marketing, Accounting, HR
  • This is the one thing that governs increasing your sales.
  • Carefully manage the constraint for that system to perform at its best. 

It is pointless to focus on some element of a business system that is not the constraint.
That system will not improve its productivity while the constraint is unattended.

Example:

• Are your sales people struggling to contact the leads you have?
  The constraint is to do with the sales people.
  Solve the constraint before spending time getting more leads.
• Are people needed in several places in the Company?
  A typical example might be an IT resource that needs to tune software in several locations.
• Is existing policy a constraint?
  For example, no overtime permitted.

Are you in a small business?

• The constraint will be you as you will be doing much of this work rather than have staff that can do it for you.
• Is your time availability the constraint?
  • Be especially sensitive and work on the most productive (80/20) parts of your business.

Perfection is the Enemy of Speed

To achieve the greatest impact, speed is important.

The 80/20 Rule teaches us that the last 20% of an activity required to get it operating will take 80% of the resources.
Go to the article: Amazing 80/20 Rule

For the fastest and cheapest progress, you should not spend a lot of time perfecting things.

This will:

• Save time by allowing you to change direction when something you experiment with doesn’t work.
• Save you spending a lot of resources on the first pass which would be wasted.

Move forward quickly and minimally.
Then come along behind and perfect systems once you know they are needed.

Aim to do the most important 80% of what can be done, not the full 100%.

The upshot of this section can be summed up as “work smarter not harder”.

Planning

Broad Then Narrow Focus

The planning process for your Profit Flywheel starts at a Companywide level.

1. Start with a common destination for the 12 month and quarterly planning periods.
This gives a common destination for the Company as a whole.
All the subsidiary parts can aim for that common destination.

2. Tune each of the relevant Departments (listed above).

• Find the main constraint in each Department (Theory Of Constraints – TOC).
• Apply the 80/20 Rule to each Departments list of changes (The Amazing 80/20 Rule).

3. Focus each Department on its contribution to the Company wide plan.

• Its improvements are neither more nor less than the improvements in the Company and in other Departments.
• If not, it will introduce inefficiencies both in the Department and/or Company wide.
• It is false economy to make a Department work as well as it can.
• Local Optima points out the weaknesses of doing this.
• Each Department works at a pace to make sure that it doesn’t hold up any other parts of the business.
• Otherwise, what you will see is a pile of Work In Progress (WIP) – wasted resources stock piled in Inventory.

Living Within Our Boundaries

When planning, set the parameters beyond which you are not able to go.

These include:

Capital and Finance:

• Don’t grow at a faster rate than you can sustain.
• It is possible to estimate how much growth your Cash Flow can support.

Go to the Menu: Cashflow

Chosen Geography:

• Do not exceed the area you have chosen to cover.

Risk Profile:

• All change and all operations involve an element of risk.
• Plan to identify these risks.
• Put in place a “Control” which will mitigate the impact of the risk as far as possible.

Got to the article: Risk Management Systems

People and Workload:

• Without doubt, there is an upper limit to how far you can ask people to expand the work they are doing.
• Your Quarterly and Annual Plan ought to consider how much extra work the human resources, that you have available, can manage.

Building the Annual and Quarterly Business Models

You are not going to be able to juggle all the implications of your growth program in your mind.

Solution:

• Build a Business Model:
  • It is a representation of the way your business operates.
  • Compile the Business Model in a spreadsheet which will allow for changes.
  • Put down the changes that you expect to make.
  • Experiment with how one part of the business interacts with others.

Go to the Menu: Profit Autopilot – Profit Focused Business Model (video’s available)

Structure of your spreadsheet:

• Use a tab for each of the effected Departments.
• Divide the model into a full period and then quarters.
• Use a Summary Dashboard for the Company as a whole.

Go to the article: Dashboard.

Start with the Destination in Mind

1. Work out a clear destination.
2. Build your Business Model and work program for the year with this destination as your aim.

Example:
100% increase in your sales.

Go to the Menu: Grow365: Grow Your Business in 365 Days

3. In your Business Model:
Work back from the destination to see what must change.

Example:

• You want to double your Sales.
• Your Business Model will identify how many new Sales Staff you are going to need for the increase in Sales.
• You have a Manufacturing Business:
  • Your Business Model will show how much your production line must increase.
  • This will give you a reality check – can it increase to supply the Sales that you want?
    • No:
    • Lower your growth target
      or
    • Plan for supplementing stages within your production cycle.
• For each level and Department:
  • Your Business Model will look at:
    • The extra Labour required to achieve the new goals.
• The changes in the Working Capital needed to fund the proposed change.
• The changes necessary in your Work Flow/Manufacturing systems to permit these changes.
• Extra Working Capital to fund the Growth.

4. Example:

Your desired destination is to double your Sales:

• Focus on an improvement in your Profit rather than an increase in your Income.

Reason:

• An increase in your Income, without an equal or better improvement in Profit, is a wasted effort.
• By focusing on Profit, you will be tuning your entire Growth Flywheel to improve Profit.

In your Business Model:

• Add back the Overhead Expenses and the Cost of Goods Sold.
• This will tell you the level of Sales required to provide the desired Profit.

Have the changes increased your costs?

• Add that to your existing cost in your Business Model.
• These costs will serve as a drag on your Profit and you need to understand the impact.

As you increase one or all the points above, they will impact your Profit.

• You will find yourself needing to increase Sales, yet again.
• This in turn requires more Labour, Working Capital and Manufacturing.
• At some point, you need to take care that you do not get into an endless loop of increasing Sales.

You will make increasing smaller and smaller improvement to Sales.
You will reach the point where it is not worth tuning your Model any further.

Go to the Menu: Profit Autopilot

5. Quarters Planning:

• Plan all four quarters in light detail.
• You want to be confident that you are going to get to the 100% point at the end of the year.
• Changes in the current quarter will have a downstream effect in later quarters.
• Put dotted lines out to the destination to be confident that you can get there.

Lead in Resources

Does your Business Model show:

• That you need more people: hire staff in advance.
• That you need more money: spend before receiving the Income.
• That you need more of other resources: equipment or supplies.

Consider the lead time required in supplying these.

Do a reality check in your Business Model:

• Allow for these inputs in advance.
• Budget for outflows of money before you get the resulting inflow.

Tracking Systems

In a business that is accelerating its growth rate, there is going to be a lot going on.
Are you a larger business? It is going to be hard for the CEO to keep their finger on the pulse.
You need to keep staff focused on the agreed activities and the agreed timetable. That is harder than it seems.

3 typical problems will creep in to distract your staff:

• The “homework” problem – students tend to leave it to the last minute, even though they have known about it for a long time. You can expect the same phenomena with your staff.
  • They will tend to leave it until the last moment to undertake the necessary work.
  • This may lead to time over-runs.

• Multi-tasking – is the enemy of efficiencies (Go to the article: Multitasking Tool).
  • Set clear priorities and directions.
  • They are to complete task A before commencing task B.

• Aim for good not perfect.
  • Too much time and staff will continue to embroider what they are doing.
  • Software is a typical example, functionality is added that you do not really need.
  • Spreadsheets and Word documents are a great example of this.

Allow your tracking system to “spin up” with the rest of the business.
This will allow it to provide you with the information you need.

Action:

On day one of your Growth Flywheel, you do not know what it is that you want in your tracking system.

There are plenty of apps that do this and it may be tempting to use one straight away.
This will be a distraction early on in your Growth Flywheel cycle.
Most of these apps will also charge a fee, it can get a bit expensive.

Use software to list tasks and measure the progress.

Start with a simple spreadsheet.

• Setup a separate tab for each department in your business.
  • List all tasks agreed upon for this quarter.
• Arrange these tasks in the order that they need to be done and give them a priority (high, medium, low).
  • State any preceding and following activities so that you can see how the change will flow.
• A “Progress” column contains a simple drop-down choice:
  • Example:
    • “completed/on track/behind/danger/on hold”
    • Colour dark green to dark red, use orange for items on hold. 

The CEO can scan each of the departmental tabs and focus on anything that has a red colour.
Everything else is either on track or finished.
This is called  “Management by Exception”.
Go to the article: Dashboard.

• Add a “last updated” cell for each level of management on each tab.
  • Example:
    • The Departmental Head will put a date in for the last time they updated their tab in the spreadsheet.
    • Their boss will have a cell where they place the date they last looked and so on up to the CEO.

If the staff know that the CEO is looking at when things were last updated they will learn to keep it up to date.
This is all useless if the boss doesn’t make the weekly checks that they said they would.
Remind staff to update each of their tabs weekly, on say a Tuesday.
The CEO emails stating that he/she plans to look at the spreadsheet on the following Wednesday.

• This process encourages people to update how progress is going on a weekly basis.
  • If staff have said that everything is up to date and at the end of the quarter we find that it is not, they can be retrained. and i
  • If necessary disciplined, to report more accurately and more timely.
• It is important that people should never be penalised for telling the truth.
  • The last thing you want is for people to hide the fact that things are not working well.
  • Your growth plans will collapse.
  • Where things go wrong, congratulate staff for accurately reporting the problem.
  • Companywide resources can focus on getting it back on track.

• You are not looking at failure of individuals here.
  • You are looking at a part of the growth cycle that turned out not to be practical.

• When you are clearer with what you want in a tracking system, select an option that suits the way you work.
  • You now know what you want to watch and report on.
  • Test the software options available to you and check they meet your requirements.

Quarterly Post-Mortem

You have built or assembled a plan that you are testing to move forward on your Growth Flywheel.

During each quarter:

Use the “Lean Start-up” method to use a series of experiments to grow the business.
“Lean Start-up” method has 3 stages:

Build
Test
Learn

At the end of each quarter:

• Test how well you succeeded on what you expected to do.
• Spend time working out what did work.
• Plan for the next quarters based on this information.
• Learn what changes are necessary in your Growth Flywheel project.
• Some things will not turn out the way you want.
• If it is not clear why:
  • Use the “5 Whys Problem Solving Technique” – Go to the article.
  • Have the team work through and identify what might have gone wrong.

Does it look as though you are running up a dead end?
You now have time to pivot to a new approach to the issue that is causing you problems.

These quarterly post-mortems are vital to keep your growth path as clear and as fast as possible.

People Are The Not So Secret Sauce

Without doubt people will drive growth in your business. They are an essential ingredient to your success.

Involving people in growth is Change Management.
This is a very large topic and it is a subject of a separate article.

Go to the article: Change Management for Profit.

It may be that in this growth phase you have demands for people power that you will not need in the future.
Consider outsourcing this short term work rather than employing people.

This will mean that:

• The outsourced people will be available to you almost immediately. Compare this to recruiting and hiring the people yourself.
• You will know the cost of the project in advance.
• The outsourced people are likely to be better quality controlled. You take a risk when you hire someone. This is especially true if you are hiring people in an area that is not your skill set.
• Outsourced people can finish immediately:
  • If your chosen growth path is not going to work.
  • If there is an unexpected market downturn.

Find the Constraints

The series of articles about the Theory of Constraints talk about the overwhelming impact that the (usually) one constraint in your business will have on the overall productivity of your business.

It is also covered in Optimise100: Streamline My Existing Operation and C3.0 Introduction to Grow Your Enterprise in 365 Days

Go to the Diagnostic Menu: Theory of Constraints

Go to the Diagnostic Menu: Money Management

Homework

There will be one subsystem in your business that is acting as a brake (constraint) on the business.

• Find this constraint and manage it.
• Your profitability will not improve until then; no matter what you do in other parts of it.

Each of the 4 subsystems will have its own constraint.

What is your main constraint in each of the following:

• Plan/Dream It: (Innovation)
• Sell It: (Sales & Marketing)
• Get It/Make It:
• Distribute It:

Now you have an idea where to start work on your Profit Flywheel.

Wrap Up

This has been a large article which covers the vital elements to growing your business.

• Start at a slow pace so that people and systems settle down. 
• Focus on the direction that is necessary to take.
• As you build competency and focus, speed up your Growth Flywheel.

Turbulence will occur along the route from where you are now to the Growth Flywheel goal.

You can take this turbulence in your stride if you have:

• A clear-cut destination.
• Confidence at a high level knowing you can get there.
• Evidence in your Business Plan supporting this.

Once your Flywheel reaches a decent speed, its sheer momentum tends to drive it forward.

• A momentary braking force or load applied to the Flywheel will not affect it.
• The very purpose of a Flywheel is to dampen the effects of variation introduced with changes in load.

Your trip along your Growth Flywheel should be as smooth and as achievable as possible with:

• The right destination.
• The “right people on the bus”.
• The right primary productive systems.

Resources

Jim Collins: “Good to Great: Why Some Companies Make the Leap and Others Don’t” (October 16, 2001)

12Faces menus/articles:

“Double Your Profit in 100 Days (Optimise100)”

“Grow My Business as Fast as Possible”

“Kaizen Leads to Continuous Incremental Improvement”

“80/20 Rule Menu”

“Theory of Constraints (TOC) Menu”

“Buffer Management”

“Local Optima Problem Tool”

“Cashflow Menu”

“Risk Management Systems”

“Change Management for Profit”

“Dashboard”

“Profit Autopilot Menu”

“Metrics for Profit”

“Parkinson’s Law”

“Multitasking Tool”

“5 Why’s Problem Solving Technique”

“Lean Start Up Theory”