Musings on Business Optimization, Economics, and Vocations

When I review financial performance with managers of middle-market private companies I find, with few exceptions, that their focus is almost exclusively on their income statements. “It’s all about profit,” they say. “It’s all about the bottom line.” In practice many chase revenue, even unprofitable revenue, but most understand that profit is necessary and that increasing it is a good thing. It turns out, however, that it isn’t all about profit. Profit is very important, but there’s more to it than that. And some of the pieces of the puzzle can be found on the balance sheet. Here's one example I often run through with businesses I work with: Suppose we have Company A and Company B, both in the same industry and making similar products. They each have $10 million in revenue and $1 million in profit. Company A creates its profit with $10 million in assets (machinery, accounts receivable, inventory, etc), while company B creates the same profit with only $5 million in as...

In the Economics courses I teach each semester, before we dive into the mechanics of supply and demand and after we establish what the science of economics is, we discuss the various types of economic systems around the world.   We spend at least a couple of classes discussing the economies of the world on a spectrum between those that are command and those that are market economies.   One source we use to feed our discussions is the Index of Economic Freedom , which ranks the economies of the world. About five years ago many of my students assumed that the United States was at or near the very top of the list.   They were wrong (as I had also been before diving deeper into the facts).   The United States left the index's highest “Free” category in 2010 and has been in the lower “Mostly Free” category ever since.   ( Interestingly, as an anecdote of how public perception has changed, today most of my students come to class expecting...

Dashboards have been a hot topic in business literature lately. Recommendations that business owners implement a dashboard for their business abound; however, advice on how to implement a dashboard is scant. I can relate to this dilemma. Occasionally, peers and potential investors would ask relatively simple questions about my aviation training company like, "What percent of your customers are repeat customers?", "What is your breakeven point?", and "What is your customer acquisition cost?" At the time, I was only slightly embarrassed that I didn’t know the answers to these questions. Regretfully, this led me to dance around the questions a bit, change the topic, and soon forget about my ignorance. I was good at flying airplanes and assembling a team of flight instructors. That's really all I needed to know. So I thought. My ignorance couldn't stay hidden forever, and I soon realized how I was hampering the growth of my company by not divi...