The Power of One is a simple yet powerful financial exercise from the Scaling Up framework, designed to help businesses improve their cash flow and profitability. The concept is based on the idea that small, incremental improvements in specific areas of your business can have a significant impact on your financial performance.
The exercise focuses on seven key financial variables, which can be adjusted by just 1% to create meaningful change in your company's bottom line. These variables include:
- Price: Increasing the price of your products or services by a small percentage can have a considerable impact on your revenue, especially if your sales volume remains consistent. This also contributes to improving your profit margins.
Example: If you run a software-as-a-service (SaaS) company and your average monthly subscription fee is $100, increasing the price by just 1% to $101 can result in a substantial revenue boost over time, particularly if your customer base is large and continues to grow.
- Volume: Boosting the volume of products or services you sell can help increase your overall revenue. Focus on improving marketing, sales efforts, and customer retention to achieve a higher sales volume.
Example: Suppose you own a fitness studio that typically sells 200 memberships per month. By increasing your marketing efforts, improving customer service, and offering referral incentives, you might be able to sell 202 memberships per month—a 1% increase that can positively impact your revenue.
- Cost of Goods Sold (COGS): Reducing your COGS by even a small percentage can result in significant cost savings, leading to higher gross margins. Look for ways to negotiate better pricing with suppliers, streamline production processes, or find more cost-effective materials or services.
Example: Imagine you run a clothing manufacturing business and spend $20,000 per month on raw materials. By negotiating better deals with your suppliers or finding more cost-effective materials, you could reduce your COGS by 1% to $19,800, resulting in significant annual savings.
- Operating Expenses: Cutting your operating expenses by a small percentage can lead to increased profitability. Review your expenses regularly, eliminate unnecessary costs, and optimize your business processes to reduce overhead.
Example: If your marketing agency has monthly operating expenses of $50,000, a 1% reduction to $49,500 can be achieved by cutting back on unnecessary office supplies, optimizing software subscriptions, or finding more affordable office space.
- Accounts Receivable: Decreasing the time it takes to collect outstanding payments from customers can have a positive impact on your cash flow. Implement efficient invoicing and collection processes, and consider offering incentives for early payments.
Example: A web development company that typically waits 45 days to collect payments from clients could implement an efficient invoicing system, offer early payment discounts, or set up automatic payment reminders to reduce the collection period to 44 days—a 1% decrease that can positively impact cash flow.
- Accounts Payable: Extending the time it takes to pay suppliers can help improve your cash flow by giving you more time to collect payments from customers. Negotiate longer payment terms with your suppliers, while ensuring you maintain a good relationship with them.
Example: If your restaurant has an accounts payable cycle of 30 days, negotiating with suppliers to extend payment terms to 33 days (a 1% increase) can help maintain a healthier cash flow, allowing you more time to collect revenue from customers before paying your suppliers.
- Inventory: Optimizing inventory levels can free up cash tied up in unsold products. Implement inventory management best practices, such as just-in-time inventory or demand forecasting, to minimize stock levels without compromising your ability to fulfill customer orders.
Example: A retail store that holds $100,000 worth of inventory can implement just-in-time inventory management or improve demand forecasting to reduce inventory levels by 1% to $99,000. This reduction frees up cash that can be used for other growth initiatives or to cover operating expenses
By making small adjustments to these seven variables, businesses can create a significant positive impact on their financial performance. The Power of One exercise encourages companies to be mindful of the compounding effect of small improvements and prioritize actions that can lead to better cash flow and increased profitability.