Just the other day, I was thinking about my 5th grade math teacher, Mr. Mercer. He was a wonderful teacher, firm with us precocious tweeners yet with a great, sly sense of humor. One of his favorite comebacks to “Mr. Mercer, can I go to the restroom?” was “You can, but you may not.” Cue the eyeroll and groan as the student watched the clock for the time between their question and the end of the class period to pass. It was simultaneously a grammar lesson, a lesson on needs, wants and abilities and a lesson about planning, patience and, depending on the day, endurance to bridge that uncomfortable gap in time.
What strikes me about that memory today is how well “you can, but you may not” applies to many companies these days, as well as business owners. We can do many things, yet we make decisions each day that result in a “may not”, creating a whole set of different gaps in our results versus our potential.
Now your mind may be going down the path of the treachery of 2020 where life has been filled with “can but may not” moments. Let’s challenge ourselves to forget about the pandemic for a while. Let’s think broader terms. What is it you need, want, are capable of? What is your goal? How does that relate to the best in class? To your potential wealth and success of your company? These are the measures of your “can”.
What about the “may” though? To determine that, you look to where you stand today. The difference is the gap you need to bridge and cross. There are three key gap metrics I believe business leaders should routinely keep track of in their business. These gaps are your ultimate measure of the impact of “can but may not”. They are the:
• Wealth gap
• Profit gap
• Value gap
In the most simplistic terms, they are defined as:
Wealth Gap = The Additional Wealth You Need to Accumulate to Meet Your Wealth Goal
Profit Gap = The Profit You’re Sacrificing by Not Operating at a Best-in-Class Level
Value Gap = The Business Value You’re Sacrificing by Not Operating at a Best-in-Class Level
Wealth Gap: Think about your nest egg. What do you have tucked away in it? What should you have tucked away in it? What could you if you put your mind to it? What do you want? What do you need? Every one of us is likely to be able to toss out a number of what we want. It’s a far rarer bird that’s on top of what they need, that is, what is their average monthly spend and what do they spend money on? What portion of the money goes towards needs versus fun wants?
This is one of the best examples of “you can, but you may not” in my humble opinion. Regardless of scale, the decisions I make today impact the size of my Wealth Gap. For example, if I take that job for “X” versus “Y” or buy this shiny new thing that caught my eye rather than make do without it because I know I don’t really need it, or swing into Starbucks regularly when I can get coffee for free at work, I’m impacting my long-term financial health.
Profit Gap: Think about the player in your industry you admire the most. They are the top of the heap and whom everyone would consider to be the best in class. What if you could achieve the same level of bottom-line profitability, on a percentage bases, as they do? What could you do with all that extra flow?
For example, let’s say the best in class player has earnings before interest, taxes, depreciation & amortization (EBITDA) of 15% of revenue. You, on the other hand, have a normalized EBITDA percentage of revenue of 8%. If you had $5 million in revenue, what could you do with that extra $350,000 ([15% - 8%] x $5 million) that’s sitting in your Profit Gap? I imagine you’d come up with a few ideas!
Again, the decisions made every day determine our results. We can elect to implement best-in-class operating strategies and techniques, or we may not. This is not a judgement; there are likely solid reasons we may elect not to. The important thing is to make these decisions and trade-off based on a good understanding of the data and the implications.
Value Gap: The Value Gap builds on Profit Gap. Taking your best-in-class profitability (measured as EBITDA) from above, what would the value of your business be if you could attract a best-in-class multiple on it? How does that relate to the current value of your business? The difference between the two numbers is your Value Gap – the amount of business valuation you are leaving on the table by not operating at a best-in-class level. You can, but you may not.
Understanding the Value Gap requires a deeper understanding of your strengths, weaknesses and risks compared to the best-in-class vulnerabilities. Best-in-class players prepare for contingencies and mitigate risks such as customer and supplier concentration, owner dependency and weak, antiquated systems. They deserve and earn the better multiple because the business is attractive and transferable.
There is a natural interdependency between these three numbers. The link between the Profit and Value Gaps is direct and clear. The integration with the Wealth Gap comes in the form of whether the business will deliver what you need it to, in the form of income and, if you’re an owner, liquidity upon the sale of the company, in order to meet your wealth goal.
We all have goals that we would like to reach. One of the factors that differentiates the dreamers from the achievers is that the achievers are clear-eyed about their goals and they understand what creates best in class performance. They know what the gaps are and commit to pushing themselves to their best potential.
They know that they can. They also know that they may not. I doubt they wait for permission.
It’s soon to be a new year. What do you think? Can, may not, or go for it?
Let’s go for it!