Page 138 - 6 Secrets to Startup Success

Your Math Story 117

ures can be found in any startup finance book or on countless web-
sites. The differences between these measures are less significant than
the common question they pose: What is your venture’s return on the re-
sources and assets that you (and possibly others) have put into it?

Keeping it simple, the fundamental truth related to your startup’s
profitability and prospects for growth is reflected in a universal for-
mula, popularized many years ago by Ram Charan and Noel Tichy
in their book Every Business Is a Growth Business.6 The formula can be
applied to any business, large or small, simple or complex. Charan
and Tichy make the point that successful street vendors, as well as
CEOs, understand its truth, and I have found it to be a powerful tool
in helping new founders cut through financial complexity and get to
the heart of profitability. It is:

R=MxV

where R stands for return, M refers to profit margin (what is left over
after expenses have been subtracted from sales), and V refers to ve-
locity (the rate at which your total asset base creates revenue). In the
airline business, the profit from each flight represents margin,
whereas the number of flights that can be squeezed into a given time
period represents velocity. In a consulting business, each billable con-
sulting day generates a fee with a built-in profit margin. Velocity
measures how many consulting days are sold and delivered per con-
sultant.

Think about dinner at your favorite restaurant. The owner wants
to maximize her “return on dinner.” Her basic profit margin (M) will
be a function of the average dinner ticket per customer (how much
each customer orders and at what prices) minus the average cost of
serving each customer (total costs divided by total number of cus-
tomers). Great restaurant managers are continually looking for ways
to increase margins. They can raise prices, squeeze out costs, or steer
customers toward higher margin dishes. Velocity (V), in this example,
is represented by how many guests can be served during a single din-
ner period. To increase velocity, the owner can turn tables more
quickly with reservation schedules that accommodate three seatings

American Management Association • www.amanet.org