Today, we're going to look at a way to measure success of our business, of our organization.
Here at the Edge, we've been learning that we're becoming a team of leaders, not just
a team with a leader.
That means every single person is leading something in their organization.
At a minimum, we're all leading our contribution.
Some are leading other team members.
Some are leading vendors or customers.
But we're all leading something.
And so we want to equip every single person to know if we're being successful.
So imagine you went to a ball game, perhaps you like football as I do, and you're sitting
there with your friend, but there is no scoreboard.
So you turn to your friend and say, well, are we winning?
And they go, well, I don't know.
We seem to be spending more time on that side of the field than I mean, I think so.
And I go, well, when does this end?
I don't know.
Maybe when it gets dark or cold or we run out of hot dogs, you know.
So as ridiculous as it would be to be in a football game where you don't know the score,
many people work in a business where they don't know the score.
So we want to introduce the idea of the triple bottom line as a means of measuring success.
So what if we created this type of scoreboard so we can all see how are we doing?
So let me share a couple of key ideas with you.
So the triple bottom line then is how we keep score.
What does that mean?
It means three things.
How much money do we make?
How many people do we reach?
And how alive is the team doing?
Now if you've only got two of those three functional or doing well or know what the
score is, you don't really know the score.
So we're going to talk about how would we measure these three elements.
When it comes to the money side, I think most people are a little intimidated because they
don't know how to read financial statements.
So we're going to make that super simple.
Now for some of you, you may need to watch this video a couple of times until you feel
like you've really got it.
But we're trying to make this as simple as possible.
So regardless of whether you have a financial background or not, you can understand how
much money did we make?
Are we winning on the money front?
So let's just walk through that.
This is a very easy way to understand financial statements.
We call it the rule of three.
Now the rule of three means we're going to break numbers into three groups of three.
Let's start.
Each of these groups are going to tell us one of three things.
They're going to tell us how profitable are we?
How profitable are our goods and services?
The second one is going to tell us how efficient we are.
And the third one is going to tell us about our environment.
So very briefly, it means the first one we're going to say, hey, we sell pencils.
They cost a dollar.
We sell them for $4.
So if we take four minus one, that's $3 of profit.
We have 75% profitable.
So we want to know, are our goods and services profitable?
Now from that $75 of profit, we have to pay all our fixed expenses, salaries, the rent,
etc.
We call those fixed expenses.
Now, once we take up gross profit, subtract our expenses, what's left is telling us how
efficient we are.
We'll get into this in a little more detail.
And then whatever's left, we have to pay taxes and so on.
And that's got to do with the environment, you know, what state you live in, what the
tax situation is, what the corporate rate is.
And then what's finally left is our final net profit.
So let's get into that.
And let me break that up for you in a couple of things.
Maybe you've seen something like this, maybe on the Internet, or this is Apple's income
statement.
And so, you know, it's a difficult thing to understand if you don't know how to look at
it.
So why don't we take that and make that a whole lot simpler?
So let's say, for instance, let's go with the first one, the profitable.
So the first group of three is we take our revenue and we subtract the cost of goods
sold.
And that will leave us our gross profit.
What do we mean by that?
So the revenue is the sales coming in.
In my example earlier on, we sold that pencil for four dollars.
And what did it cost us to make that pencil?
One dollar.
So our gross profit would be three dollars.
In that particular case, that would be seventy five percent profit.
Now, of course, we didn't just sell one pencil.
We sold however many pencils for the month.
So let's say our revenue was one hundred thousand dollars.
And we had to go and pay the manufacturer twenty thousand dollars.
That's what it cost us.
And finally, we had a gross profit of eighty thousand that left us an eighty percent margin.
We want our business to be forty percent or better or it gets very difficult to support
all the expenses.
So what's the difference then between cost of goods and expenses?
Expenses or cost of goods are what we call variable costs.
For every pencil I sell, I have to pay the manufacturer one dollar.
Whereas our general expenses like rent and payroll, we have to pay that regardless if
we sell anything or not.
If we sell little or we sell a lot, we still have to pay fixed expenses.
So what we're talking about here is the variable expenses.
How many one dollars do we have to pay for the pencil?
So to make that really simple, we sold $100,000 of pencils, we had to pay the manufacturer
$20,000.
Our gross profit is $80,000.
This tells us how profitable our pencil business is.
We have an 80% gross margin.
Now that's helpful because that tells us we have a very profitable business.
Now if that percentage drops down over time because it gets more expensive to manufacture
or now there's more competition and we can't sell them for $4 anymore, now we have to
sell them for $3, then of course our percentage is going to drop down as our profit decreases.
And that's why the ability to set our prices and control our prices talks a lot about the
strength of our business.
Okay, let's go to the next group of three.
The second group of three is when we take that final gross profit that was in the previous
group.
So that was $80,000.
We subtract our expenses.
Now remember our expenses here are all our fixed costs.
We have to pay payroll, rent, the phone, whatever it is.
These are things we have to pay whether we sell anything or not.
So let's say in this case the expenses are $70,000.
That means this month we made a net profit of $10,000.
So that means of the original $100,000 we sold, we've only got $10,000 net profit.
So that's a 10% profitability.
Now what this tells us, this group of three tells us is how efficient are we?
In other words, we've made $80,000, how much of that $80,000 did we keep?
This tells us our efficiency.
If we've got too many expenses, if our rent is too high, we have too many people working
for the organization, then obviously the net profit is going to get smaller.
So if we get really efficient what we do, and part of the concept of creating a team
of leaders is to become a highly innovative and a highly productive team so that we can
have a better net profit.
And when the company does better, not only do people have jobs, but there's much better
opportunity for bonuses and so on.
So before you think, oh this is a great business, this person already made $10,000 not so quick.
Because we have to consider the environment.
Maybe there's state taxes, federal taxes, or whatever it is.
So that net profit has to have depreciation and other expenses.
So let's say that $7,000, so the net operating profit here is $3,000.
In other words, of the original $100,000, only $3,000 is left.
So this is why taxes play such a massive role, because now the company can only share that
$3,000 to its shareholders and bonuses to its employees.
So now we've seen the three groups of three.
The first one told us, again, how profitable is our product or services.
The second one told us how efficient, how much of that money do we keep.
And the last one is based on our environment, which country we do business in, which state,
etc.
And that's why some states attract businesses, because they're trying to become more profitable.
So let's put it all together.
So now we have an income statement.
We have revenue minus the cost of goods sold, leads us with our net operating profit.
And then we go all the way down to expenses and finally our final profit.
So now you know how to group them in groups of three.
You take the first three together, the $100, the $20, and the $80.
That tells you how profitable you are.
Then you take the next group, the $80, subtract the expenses, and you have profit.
That tells you how efficient you are.
And then, of course, you pay your taxes.
And that tells you about your environment.
So I hope that was really helpful to understand the basics of being able to read a financial
statement.
Now we've talked about the first three groups, again.
And then we talked about how it's the second three groups.
And there we have...
And of course, the final one is just to add in the environment.
So let's take a second and talk about then this top or bottom line.
We've talked about money.
How do we measure impact?
What do we mean by how many people did we reach?
You know, if you're a non-profit organization, that might be easier to understand.
Maybe you're feeding the poor or you're, you know, involved.
in some sort of social justice mission,
that's easier to measure.
When you're a for-profit business,
the question isn't how many customers did we sell?
Maybe that's a starting point,
but really, what value did we bring?
So here's some key questions we can ask
to see what are we offering?
Does that make sense?
Do we, are we bringing real value?
So what, you know, is what we're offering
bringing real value to our customers, right?
How can they experience goodness from our team?
What do I mean by that?
It's the way we treat them.
It's in the small things, the politeness,
the way we show, we go the extra mile.
Do they experience a goodness in our customer service
or from our salespeople or from the, you know,
in the interactions?
Do vendors feel like when we interact with your team,
there's a, we feel like we received something
more than just a transaction.
And so, you know, how we provide our products and services
can have our customers or our vendors
feel a certain goodness they're experiencing from the team.
Now, everybody knows we all wanna do business
with people who treat us well.
You know, we go, those are good people.
I wanna do business with them.
This has a huge impact on your business.
And so it's how, you know, how well do we listen
to improve our products and services?
Can we bring more value to our customers' lives?
Now, you might be thinking,
well, that's like product development.
Actually, what I'm speaking about here is the small things,
the tone of your voice, how you treat people.
Do you follow them?
Do you arrive on time for meetings?
Are you five, 10 minutes late?
If you met with our team on having a Zoom call
and you got on, you know, three, four minutes early,
our whole team will be sitting there waiting.
And the reason is, is we want to make,
show a level of respect to people's time.
Now, of course, there are very rare exceptions
in which that's not as possible,
but in general, that is the culture of our organization
because we're sending a message, you're valuable,
we appreciate you, and we respect your time.
So this is a very, very simple idea of thinking about
how do we bring value, not just to our customers,
but perhaps to our community.
You know, the city that we live in,
is there some other goodness we can bring?
So we're really measuring, a way to think of it is this,
you know, a great leader is teaching,
is bringing good, being good to their team.
The part, you're on this edge training,
that's your leader who has invested in you
so that you can learn all the best leadership practices
from around the world, because if you ever leave here,
you're gonna be the smartest person in the room.
Now, that's just being good to you, right?
That's an investment in you,
regardless of whether you stay or go.
So that's being good to your people.
Then we're teaching people to be good at what they do,
and that's what the rest of the Edge program is about.
And then finally, as a company,
how are we gonna show goodness to our customers?
So it's all about goodness.
So again, how alive is the team?
We measure this by shiny eyes.
You can walk around the organization,
you know when the light goes on, they got shiny eyes,
I love what I do, I can't believe I get paid to do this.
We want every single person in our organization
to feel that.
We do not want them to just be mailing it in,
just arrive, get the paycheck, leave.
People like that, you know,
do not survive in this type of a culture.
So when we're thinking about this,
the question here is how alive is the team
that we lead?
Look, life is precious,
and studies show that over 60% of Americans
hate or dislike their job.
What a waste of human life.
We have an amazing opportunity to change that.
And so I love the term that Ben Zander,
in his book, The Art of Possibility,
speaks about this concept of shiny eyes.
He talks about a way for a leader to measure
how well they're doing as a leader.
So it's a beautiful definition for success.
You know, it's really simple,
and I love looking around our team,
and every now and again you notice one of the team members
doesn't quite have shiny eyes,
and it's almost always something we can do to address that.
You know, leaders often push back on this
as a primary means of measurement of how's the team doing.
But if you think about it long enough,
you can see that you can take a group of ordinary people
who become fully alive,
and they can achieve extraordinary results.
I mean, this is the genius, right, of a great leader.
We expect that we have to hire superstars who became superstars somewhere else.
What if we create the superstars right here in our own team?
And what if you, as one of the members of this team, is a superstar in the making?
You know, one of the great questions, to me, the first question of a great leader is, what
am I being that these people do not have shiny eyes?
Not why these people don't have shiny eyes, why don't they listen to what I say?
But better is, what environment have I created?
How have I made them, what's the context I've created?
And so to me, that is a fantastic way.
So let's wrap this up with the old way of measuring success versus the new way.
The old way is, hey, this is my standard, this is what I want, I expect you all to live
up to it.
Under this model, you know, people are hitting that standard in various degrees.
But the bottom line is, there are always less than.
There's always just a degree of how much they're missing it by.
And you might say, well, you know, we're a group of people who set high standards.
A far better way is if you invest in people, they have shiny eyes, and together they set
the goals.
Now you're working into possibilities.
It's not a standard to live up to, it's a possibility to live into.
And what I have found in 35 years of working with teams is that when you give people an
amazing possibility, a grand possibility, it enrolls them, it gives them shiny eyes,
like we're doing this big goal.
And that's, you know, and everybody now understands what I do matters when the work I'm doing
moves the triple bottom line.
It helps the customers, it's bringing profitability.
They understand that what they do contributes to the bottom line.
This adds deep meaning and deep motivation and loyalty to the team.
Look, I understand, there's always a group of people who are what we call the takers.
No matter how much you invest in them, no matter how much, they don't want to grow,
they want their paycheck, and they don't survive in this type of environment.
They just get flushed out by it.
But for the people who do want this, they love this.
They love this whole concept.
So the power of a fully alive team, when a group of people who are providing incredible
value to their market are fully alive doing it, their best creativity is released.
They grow far beyond what they thought they were capable of.
It is one of the most exciting things for me as a leader to watch a team just blow way
past all the standards and, you know, the goals they had set for themselves.
I'm surprised so many times, sometimes it's the person I least expected to pull it off.
And I love that everybody gets to be the hero of the story throughout this journey together.
And that's what great leaders do.
They focus on the triple bottom line.