Company Financials: The Impact of Company Culture on Profit

Business diagram on financial report with coins and calculator.

In this article, we’ll discuss how culture management sets boundaries and limitations for company financials. Specifically, we’ll be focusing on the following topics:

  • Five-star rating system
  • Innovation – R&D expense
  • Customer satisfaction and retention – Revenue
  • Management effectiveness – Revenue – Strategy and performance
  • Employee productivity and retention – Wages and benefits
  • Financial predictability

Whether your business is in the B2B or B2C sphere, effective cultural management will shape profitability and shareholder value.

Five-Star Performance: Greater Expectations

Today’s companies must set high expectations if they expect to succeed and stand out from the competition. The Five Star Standard is a simple rating system that applies to both customers and employees.

“Average” in traditional rating scales equates to a C. With the Five Star Rating System, think of each star having a value of 20%. If a company is to gain competitive advantage, four stars is the lowest acceptable rating.

The Star Rating System is a model of simplicity. It benchmarks both customer and employee perception of a company. With this system,

  • Five stars = Superior
  • Four stars = Satisfactory
  • Three stars = Inconsistent
  • Two stars = Needs improvement
  • One star = Critical

More specifically:

  • Five-star performance means consistently superior customer and high employee satisfaction and retention. Five-star relationships generally result in a greater pool of strategic customer relationships as well as greater employee retention and productivity. Strong company cultures are typically proactive with risk management.
  • Four-star performance means satisfactory customer and acceptable employee satisfaction and retention. There may be some inconsistent satisfaction or shaky trust from customers and employees.
  • Three stars or less generally means inconsistent, unpredictable, and sometimes incompatible customer and employee satisfaction. Competitors are probably winning both customers and employees.

Rating Organizational Culture

“Organizational Culture is a system of shared values, beliefs, and business practices.” – Investopedia

The Cultural Management System governs how employees and teams behave, communicate, plan, engage, and perform within an organization. This system measures and benchmarks organizational perception from all employees.

The Cultural Management System also governs how management and employees communicate quality, innovation, value, service, and relationships to external customers. Customer satisfaction is measured and benchmarked through a star rating process.

Pivot Your Thinking

Continuous improvement is necessary to achieve company financial goals. Effective culture management shifts culture from a subjective ideal to a managed discipline. Look at your toughest competitor, and determine how the following areas influence your financial status.

Innovation

Company culture plays an important role in innovation. Successful companies invest significant resources into R&D. Some investments may be extensions of existing products. Other investments may go beyond core competencies.

Innovation accomplishes three objectives. First, it provides new income streams. Second, it creates the opportunity to collaborate and innovate with existing customers. Third, it allows companies to discover new customers.

Five-star customer relationships encourage and support greater investment in innovation.

Customer Satisfaction and Retention

Revenue and earnings erode with the loss of a strategic customer. Customers often leave because of company business practices — not because of price. Price is just an easy excuse.

Business practices are a function of culture. More often than not, price is a muted response to a bad experience from an employee or business practice. Customers reach their limit of bad experiences, opening the door for a competitor to “win them over.”

Management Effectiveness

Leadership and management are two distinct skill sets.

➢  Leadership is consistently engaged with customers, management, employees, and the operational environment in order to increase company value.

➢  Management is consistently engaged in processes and systems in order to increase company value.

The real sign of a five-star culture is when leaders and managers cease being “firefighters” and actually have time to lead and manage. The “fires” of dysfunction, lackluster performance, and poor communication die down, and real innovations and improvements can take place.

Employee Productivity and Retention

Employee attrition has tremendous financial liability, influencing management, productivity, risk, and overall company culture. Employee wages and benefits, training, and customer relationships all have a price.

Superior cultures have well-defined employee selection processes, making it easy to identify the right person for the right job. We hear from some managers that they don’t have sufficient time to manage a selection process — as they enjoy another day of “fighting fires.” But the fact is, selecting quality employees is critical to culture management.

Recruiting and selecting productive employees begins with an accurate job description. Identifying primary objectives and activities allows a company to target specific skill sets.

Working Environment

Cultural Environment: An Incubator of Employee Productivity

With superior communication, training, and accountability, five-star cultures bring about superior employee productivity. Fair accountability means that all employees are held to equal expectations. There is mutual respect among team members and management.

But believe it or not, fair and equal accountability are among the top complaints we’ve come across in employee assessments of companies of all sizes. Fair and equal accountability supports the notion of a team, rather than gangs of employees or workplace cliques.

The truth is, people are fragile. Quality workers expect a team-based culture, job security, and fair compensation and benefits. Exactly in that order.

Financial Predictability - Managed Growth

Financial predictability influences banking and financial relationships. From a lender's perspective, cash-intensive companies and inventory credit lines are influenced by predictable revenue. The source of predictable revenue is culture management.

For investors, well-managed growth generally indicates predictable results. Wide swings in revenue, liabilities, and earnings are sometimes an indicator of challenges. Why invest in a leadership and management team that is off course?

  • Four/five-star-rated companies generally have developed a larger pool of strategic customers. They are better able to predict and manage their financial status. EBITDA (earnings before interest, taxes, depreciation, and amortization) values are generally more significant and stable.
  • Three star-rated companies are often less consistent. Customers and employees recognize the inconsistency. Inconsistency is expensive and dysfunctional to customers. Quality employees view inconsistency as a lack of leadership.
  • One/two star-rated companies typically operate in chaos and mayhem. The business environment is uncomfortable and unpredictable. Financial predictability varies from day to day.

Creating a Strong Company Culture

Four- or five-star-rated company cultures allow leaders, managers, and employees to operate the business more efficiently — and more profitably.

 

Image Credit: kan_chana/Shutterstock.com

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