Many business owners want to know what our “secret sauce” is to improving operations, maximizing profit, and growing a business.
Well, the secret is out.
At American Management Services, we use an extraordinarily effective system called closed-loop management.
A closed-loop management system is a series of multiple stages set to reach a desired outcome. Each stage throughout the closed-loop system feeds into and affects one another.
In this article, I’m going to give you the rundown on how closed-loop works, and how it can help you accomplish your business goals!
It starts with the implementation of a business plan. Think about what you want to accomplish in the coming year. Think about profit, if you’re looking to expand your operations, increase your market share, and more. The goals you set here will be what you measure your results by.
Every business we’ve worked with has six moving parts. They are:
- Management Methods
- System of Reporting
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No matter your type of business, every organization has these six moving parts.
The purpose of a closed-loop system is easy and it’s two-fold; determine what a company’s profit should be, and what that company needs to work on to reach that profit goal.
Waiting For Profit Is The Wrong Approach
When calculating profit, most businesses will wait until every item of expense is paid out – leaving whatever is left over as profit. This is wrong! This is what we call ‘residual method.’
Rather than waiting to see what your profit is after paying everything out, you make profit your first line item of expense. Simply put, you set aside a certain percentage of every dollar you generate.
It’s a simple concept but it requires discipline and training to implement and sustain.
After creating a goal – or series of goals – based on your pre-determined profit plan, implementing flash reporting is the next step in closed-loop management. You don’t know what you’re getting in return if you’re not measuring it.
Know Your True Costs
Closed-loop, if used correctly, will hold you and your business accountable to two standards, operational and financial.
Can you accurately define your true operating costs?
Once you put in place flash reports, or measures of your moving parts, you can determine the exact cost of operation, overhead, labor, equipment utilization, and your desired gross profit.
Whether you are a $300 million dollar operation with all the fancy ERP systems in the world, or a $7.5 million dollar plumbing contractor working off excel spreadsheets, understanding your true costs will allow you to: quote better, control operations better, and improve margins and profits.
Hold Your Staff and Yourself Accountable
Reevaluate your staff by making sure everyone is on-page with your goals and the goals of your business. Communicate with your staff regularly and establish an atmosphere that promotes growth, productivity, and motivates employees perform extraordinarily.
Put someone else in charge and shake up your organization. Sometimes a fresh perspective and change in pace can help motivate a staff, and identify and correct the issues festering within an organization. Take advantage of the offloaded responsibilities and start exploring new growth opportunities.
Hold yourself accountable to a board of trusted advisors. Most owners hate this idea, because it defeats the freedom of owning a business, but answering to a board is one of the most effective ways of holding yourself accountable!
Your board of advisors should be made up of 2-3 experienced business owners who you know have had significant success, and are willing to give honest insights and opinions about you and your organization. I would never use members of your staff, including accountants or lawyers.
We believe in pay-for-performance, meaning rewarding your employees for executing according to plan.
If profit levels exceed the desired pre-determined profit plan, then a percentage can be pooled together to fund the pay-for-performance plan.
Key personnel would own a share of the pay-for-performance plan. In periodic evaluations, ownership would calculate the funding of the pool and grade employees based on their flash metrics.
There is not one section of closed-loop management that works without the other. Every section of closed-loop management works in tandem with one another to achieve a specific goal. If one section isn’t running properly, the whole system fails to run smoothly and problems arise.
What To Do Next
Plan, plan, plan, plan!
Your goal should be to maximize profits in your business . If you want to learn more, I highly encourage you to Google “closed-loop management” and research this further.
Or, if you have questions, the better option is to call me—(800) 743-0410. American Management Services has been in the consulting business for over 34 years.