I’ve only been in a Fortune 500 boardroom once. I will never forget it.
The conference room had an incredible view of Manhattan.
The boardroom table itself was a gorgeous mahogany table that seated 60 people.
I’ve never seen a conference room table so large before.
The table was so large that every seating position had its own microphone that was attached to a public address amplification system. This allowed a board member at one end of the table to hear someone in the middle or at the other end of the table.
I would not be surprised if the table with its 60 embedded microphones and chairs cost $250,000.
My first thought when I walked in was... "Wow."
My second thought was, "Look at all that unnecessary cost."
In contrast, my favorite boardroom belonged to a clothing retail chain in California during the Great Recession of 2008. The company had suffered a 40% drop in sales... but was still profitable!
If you know finance, especially the finance of retail businesses, that’s nearly impossible.
However, sitting in their “boardroom,” it was clear why the business had such financial resilience.
The “boardroom” was in the company’s inventory warehouse.
Guests were invited to bring their own jackets because they don’t heat the warehouse in order to save money.
I loved it.
Instead of the $250,000 table, we sat in $12 plastic lawn chairs.
When the CEO explained their gross margins, I was wowed. I had never heard of a retail business with such high profit margins.
Of course, I was admiring the company's financial management while also feeling a little chilly.
Among my clients, I’m known as a traditionalist. I believe a well-run business is one with a well-defined target customer, a well-differentiated product, and sound financial ratios.
At the end of the day, no amount of publicity can offset the gravity of math.
This is especially true in the technology sector in which I am working more often these days.
There’s a fundamental difference between a company that isn’t profitable yet (but has the healthy gross margins conducive to long-term profitability) versus a company that mathematically can never be profitable (because it has negative or abysmally low gross margins).
Gross Margin = Price of Your Product - Cost of the Product
If you sell a $100 product and it costs you $50 to produce, that's a 50% gross margin.
If you sell a $100 product and it costs you $120 to produce, that’s a -20% gross margin.
Business A can be profitable if it grows revenues enough to cover the non-product-related operating costs (such as sales, marketing, customer service, finance, and human resources).
In contrast, Business B can mathematically never be profitable at any size unless there is some dramatic miracle shift in the company’s ability to raise prices, reduce costs, or add high-profit revenue streams that only become possible at a certain size.
In a world of Unicorns (startup companies with a $1 billion+ valuation) enabled by an excess of capital at near-zero or negative interest rates, it’s easy to think that the math doesn’t matter.
But the financial math always matters... eventually.