There are limits to financial analysis. Financial analysis measures what’s easy to see and count in the past, and “the numbers” are all symptomatic outcomes of your controllable input decisions. So, using financial reports to be cost, asset, and cash flow efficient is smart, but you can go one step further and uncover financial blind spots with your own invented models and metrics.

Would Warren Invest in You?

Warren Buffet places big investment bets.  He buys companies that have super-profitable niches, or moats, with a focused strategic effectiveness. These are companies that throw off free cash flow, have great management and a leadership that plans to protect, grow, and leverage the moats. They are also companies that have systems that will scale their moat’s strategy for growth.

How do you measure intangibles like effective strategy, management, and systems? Here’s how.

Metric Development Steps

1. Pick a theory for how to measure the causes of your most net-profitable business. (Hint: customers with the greatest volume of highest average gross profit dollars per invoice.)
2. Create a cost to serve (CTS) model to zero in on these accounts.
3. Visit them to get insights for experiments to better retain and partner with them.
4. Invent metric(s) for tracking your experiments.
5. Perfect models, fail-safe experiments and tracking metrics can’t be achieved in a dynamic world with inconsistently executing branches. Instead, develop good-enough models, metrics, and tracking reports. These will provide better focus and guidance for your theory and help you make consistently better incremental decisions that will statistically increase your odds for better financial outcomes. You will also learn by failing from these small-bet actions.
6. After nailing new value offerings, scale them. Crack more “best” accounts. Expand the moat.
7. Let product promotions that competitors put forward be secondary to service value innovation for your key accounts. As a by-product of service innovation, you will grow sales, profits, and rebates faster.

Profit Growth Theories and Their Novel Metrics

My favorite distribution turnaround theories that support this core moat renewal are:

• My Kinetic Chain of Profit Power that includes Buffet’s three favorites plus four more
• Jim Heskett’s Service Profit Chain
• Nine Steps to a System, a team-sell process for key-account wins

For more on these models, google: “merrifield + (the model in quotes)

For More on How to Uncover Financial Blind Spots With Your own Invented Models and Metrics

• Catch future blogs that will focus on each of my three profit growth theories and metrics.
• Attend my presentation, “Discovering Your Best Innovation Metrics,” at the Advanced Profit Innovation Conference on April 20-21 in Scottsdale, AZ.