The power of theoretical potential
I was recently listening to one of the Founders podcasts by David Senra. It's one of my favourite podcasts, and in this episode, he was talking about how Elon Musk thinks.
One of the things he does is to create what he calls an “Idiot Index” for every product they build. The idiot index is the difference between the cost of an item, and the material that the item is made of.
For example, the idiot index of rockets, before SpaceX existed, was about 2%. That meant that the total cost of the materials and parts that went into a rocket, made up about 2% of the cost of the rocket. The other 98% was made up in layers and layers of logistics, suppliers, inefficiencies, and of course, also some genuine manufacturing costs. By cutting out a whole lot of steps in the supply chain, or by making things himself, he made rockets at a tenth of the price that had been thought possible.
The idiot index creates a theoretical best-case scenario. When Musk looks at a process, he asks, "What is the theoretical maximum speed of this process?" What is theoretically the fastest that something can be done—and then what is the idiot index? How fast are we doing it right now? And what causes the idiot index to be what it is? What is slowing us down?
Applying this to the 5-2-50 Challenge
So I started applying this thinking to The 5-2-50 Challenge.
Each business that joins the 5-2-50 movement commits to three goals:
- Grow to at least 50 people.
- Get to R 10 million per year net profit.
- Free the founder.
We call these goals “The 5-2-50 Challenge”
We focus on businesses of at least five people that have been running for at least five years, and we want to grow them to 50 people.
Five people to fifty people. Five to Fifty. 5-2-50.
Theoretically the fastest way to do this
What is theoretically the fastest a business can grow from 5-2-50, get to ZAR 10 mil per year net profit, and free the founder?
My intuitive immediate answer, when I first asked myself that question, thinking of a typical services business, was the length of one lead-to-cash cycle.
If your current average time from when you first see a lead coming into your business, until you see cash landing in the bank from a sale made to that person, is 60 days, then in theory, you could 10X your business in 60 days. That was my intuitive first response.
But does this intuitive answer survive scrutiny? Let's see:
How to achieve this
Immediately you may have a thousand reasons why this is impossible, but bear with me.
Taking a moment to think about what is theoretically possible, helps us see possibilities in practice that we have not seen before.
Let us assume for a moment that capital is not a constraint in your business.
What is then necessary for a business to achieve these three goals? You would need to have the following:
- 50 people in total
- A structure and culture that deploys those people in the most effective – or at least an effective enough way – for them, together, to run a series of processes that can generate R 10 million per year in net profit. To make it easier to follow the example, let's assume this business runs at a 10% NPAT. That means the team must be able to consistently sell, deliver, and collect payment for about R 8.3 million of goods and / or services per month.
- Ensure that out of those 50 people you have a small leadership team that is competent enough to run the business without the founder's involvement.
What is the fastest way to create the above? Here is one approach, and there might be variations and alternative views, but this is one that could work:
- Identify what is currently your highest Gross Profit offering. By focusing on one offering you simplify your business. By focusing on what gives you your best GP, you maximise your chances of success.
- Map the most efficient process you can, to deliver that offering (from sales all the way to collection of payment) as efficiently as possible. Apply the same approach we are taking here – What is theoretically the fastest and cheapest way you can deliver that product at the level of quality required?
- Think hard about how you can make the time from lead to cash even shorter. Can you take up-front deposits? Or maybe even bill for the full product up front? Can you cut steps out of the process altogether? The simpler you can make this process, the simpler your business will be to run. Simpler is more efficient. Simpler is easier. Simpler is more likely to succeed.
- For each step in the process, write a clear job description of what the people in that step will have to do, and what skills and characteristics they need to have.
- Think hard about ways in which you can make each of those steps easier and simpler – so that you need as few highly skilled people as possible. The more skilled people you need, the harder and the more expensive it will be to recruit them. Brainstorm how you can accelerate training. Often breaking steps into smaller steps makes the job easier and accelerates training. Ideally you want as much as possible to be able to hire on attitude and train for skills, especially in the South African market.
- Calculate how much of that product you need to sell, in order to generate R 8.3 million in revenue per month. By focusing on your highest GP offering, you can be almost guaranteed that this revenue will give you at least your current NPAT – Probably better. Doing it this way saves you having to do the mental gymnastics of trying to figure out what the NPAT from a specific offering or mix of offerings will be.
- Based on your best available current knowledge of the performance of every step in the process, and the number of people you have in each step at the moment, calculate how many people you will need at each step, in order to deliver that amount of the product. This includes the sales process. From generating leads, all the way to delivering the service and actually collecting payment.
You may not have all the exact numbers available. But your best estimates will probably be sufficient for this. You've been running this business for long enough to have a pretty good idea of these numbers.
- Slot those people into the simplest possible organisational design you can, according to the process you've mapped. Most likely a very simple 3 level hierarchy. Front-line, a few supervisory roles, and a management team with one leader.
- Count how many people you now have in this design. If it is less than 50, then add people in the places where they are most likely to accelerate throughput. Think about where the constraint likely would be – add people there until the constraint shifts – then add people at the place constraint will have shifted to – and so on, until you have 50 people in your structure. (If you are wondering why I am insisting on adding people – Remember that the ultimate goal of 5-2-50 is to create good jobs. So 50 is a critical minimum goal of The 5-2-50 Challenge.)
- Make sure that you've put a leader in the structure that is not you, that will be able to lead this organisation, with at least 3 people to support that person. Typical roles that are sufficient for a business this size would be a GM, a Sales Manager, a Production or Operations Manager, a Financial Manager, and a People / Culture manager.
- For our theoretical exercise, capital is not a constraint. So your next step would be to go to a bunch of recruitment agencies, give them all these job descriptions with the numbers for each position, and tell them to recruit as fast as possible.
- Up to this point, this is, for most offerings, no more than a day's work. If you put a Saturday aside, started at 08:00, there is a very good chance that you could have sent the job descriptions to ten recruitment agencies by 16:00 that afternoon.
- Considering the high unemployment rate in South Africa, and the fact that you're focusing on your one most lucrative offering, and that you've now broken it into its simplest steps as far as possible, so that you can hire for attitude and train for skills – There is a good chance that you will be able to fill these positions within a few weeks. Let's say a month.
- So within a month, you can have an organisation that is designed, structured, and staffed – from lead generation to cash collection, to deliver R 8.3 million per month.
- The time from that moment, until you bill the first month's R 8.3 million will be dependent on the cycle time of the whole process from beginning to end. That cycle time, plus the month it took you to build the organisation is the shortest theoretical time in which you can achieve this. So let’s say you run a services business where your typical projects take about a month from lead to sale, then run for about 3 months, you can only bill at the end of the 3 months and your customers insist on 30 day payment terms, then you are looking at about a 5 month cycle time. So with your setup time that's 6 months.
For a business with those kinds of cycle times, it is theoretically possible to reach 50 people, ZAR 10 million per year net profit, and free the founder within six months.
For most businesses in most industries, this is definitely no longer than one year.
Adding some reality – What is the real constraint?
Now let's overlay some reality on this.
What are the major constraints holding you back from doing this, starting tomorrow?
It is probably not the market. If you are already selling this product, and it is your highest GP product, and you are employing at least 5 people and have been running for at least 5 years, you have probably proven that there is a market. It is unlikely, at these kinds of numbers, that you are a significant player in this market. So there is market share for the taking. If you streamline and populate your sales team well, then you should be able to expand.
It is probably not finding the people. If you designed your process well, and broke down the steps, you probably can find people with sufficient skills that you can train for the gaps relatively quickly, especially if you hire people that come with batteries included.
The thing most likely holding you back is cash. How much cash?
In the above example, in theory, 6 months worth of cash, because by the end of the six months this whole engine should begin to pay for itself.
If the average salary in your industry is R 25k per month (which is high for some industries, but low for others), then you need R 1.25 million per month, which is R 7.5 million over six months.
Debt is relatively expensive here, so let's say you succeed in borrowing, you are probably going to pay somewhere between 10 and 15% p/a. Let's go for the high end. You're going to have to pay about R 94k per month interest at 15%. And you'll be making R 833k per month net profit after tax. So you can comfortably cover the interest, and pay off your debt in two years without taking too much strain.
Banks and risk being what it is, you probably won't be able to borrow this money, so this is where the theoretical picture breaks down.
You probably cannot do this
You'll get to the end of your Saturday, and realise that you cannot immediately employ all these people.
BUT you CAN do THIS:
However, what you can do, is immediately look at your process, your map, and your organisation design, and ask yourself,
“Which person, if I employed them in the next month, would begin to move me towards this process beginning to perform at this level?"
Or:
“Which step in this process should I focus my time and attention on, to accelerate the revenue generation of this business, to get me to be able to afford that next person?”
If you focus on your current constraint in your highest GP offering, that person will probably generate their own salary within the month you employ them, because of their acceleration of the whole process. If you keep doing this, you will keep accelerating that process, and that will be your fastest practical route to getting to the three goals.
Can YOU do this?
I firmly believe that many businesses, if they were to give it this kind of focus, could achieve The 5-2-50 Challenge within a year.
- Grow to 50 people
- Grow to R 10 million per year NPAT
- Free the Founder
Most people reading this may dismiss this as theoretical and impractical.
But if you are reading this, and feeling excited that this might be possible:
I would love to form a special focus 5-2-50 Growth Group consisting of 12 entrepreneurs who are keen to try this. If we can prove that we can make this work, this can become a blueprint for business growth that we can scale to create millions of good jobs across the continent.
If you would like to participate in this challenge, register at https://www.5-2-50.co.za/founders, and just hit reply to this email to let me know you've registered and you are interested in this challenge.
If you know of someone who might be excited by this prospect, please forward this to them.
To Your Success.
Ashton
If you're passionate about growing your business whilst also being part of something greater, my latest book is a must-read.
5-2-50: A Manifesto for Eradicating Poverty in Africa
Grow your Business.
Free the Founder.
Eradicate Poverty.
Now available in Kindle, Paperback, and Audible format on Amazon
https://a.co/d/03ZLhBsr
Soon to be available as a locally printed paperback in South Africa. https://forms.gle/yivrbgGAzg48nSjw8
Grow Your Business
5-2-50 is a Movement of Christian small business founders dedicated to creating a million good jobs by growing 25 000 small businesses of at least 5 people, that have been running for at least 5 years, to 50 people or more, to ZAR 10 million NPAT, and to Free the Founder from the day to day grind of the business.
To achieve this, we need founders, facilitators, coordinators, creators, influencers and church leaders.
If this excites you, see how you can get involved: https://www.5-2-50.co.za/
