On one of my first days in class as a first year MBA student, my professor walked in and wrote this on the board:
P*V-C=$
He then proceeded to say, “This is what business is all about, sorry you paid so much to learn it.”**
This beautifully simple equation continues to be a great framework to evaluate businesses and thing about strategic decisions. Anything you do within your business should pull one of these levers:
Increase price
Increase volume
Decrease costs
When you pull these levers, you make a bigger money machine.
If I was going to organize a business, I would have one member of the C-suit in charge of one letter. There would be a CEP, CEV, CEVC, CEFC. CEP is in charge of what amounts to marketing – figuring out how to make a product that people will pay for and how much they will pay. CEV is a combination of logistics, marketing, and advertising. CEVC and CEFC are in charge of operations and finance.
With the understanding that this is a dynamic formula (it is nearly impossible to increase price without decreasing volume and there is often a trade of between fixed and variable costs), the CEO’s job is to coordinate efforts. Coordinate and optimize.
**there is of course one more wrinkle, the difference between fixed and variable costs. The formula is P*V-VC*V-FC=$
Tags: Ashleigh Williams, Jon Williams, money machine, P*V-c=$
