If you don't know this growth rate and you go and grow your business, well, guess what? If you don't also have capital to sustain the growth, you go out of business.

Does your strategy need a strategy? When it comes to strategy, there are three types of businesses that I see out there. Which one are you? And I could tell you I've been all of these throughout my career. So don't feel bad wherever you are right now in your business.

The first type of company is one where they don't have a strategy at all. This is because they may not have the time, the resources, or the expertise to develop their own strategy. Or they may think strategy’s for the birds. So what they do is they just grind it out. They rely on sheer heroics. They get work, they do work, and they pray at the end of the day, there's enough cash in the business to keep the lights on.

The second type of business is one that realizes the value of strategy. So they're a step up. They pursue different frameworks like mission, vision, and values, or maybe it's EOS or Traction or some other type of strategy framework out there — SWOT, the seven S's. They have some type of strategy framework that they follow, but they don't really know whether it's creating value. So that's the second type of company.

And then the third type of company is a step up from that. They have a strategy. They also have a plan, which is a distinct thing. A strategy and a plan — or strategic planning and strategy — are not the same thing. They recognize that, and they're able to create value from their strategy.

Now, look, I'm not one to believe that strategy is all about predicting the future. Instead, it's all about making interrelated choices about where your company's going to compete, how it's going to compete, and ultimately how it's going to win. And there's a framework, but ultimately it has to tie back to value creation. And that's where a lot of companies go astray, because they miss out on that.

So let's jump into the first way to know whether your strategy is working. So after you listen to this, go to your team, right? Go to your employees. You could start with one-off conversations. You can pull your team together, however you want to do it and ask them this: What is our strategy? What is the strategic problem we're trying to solve? What are our initiatives? So ask them to either write this down or they could verbally communicate it back to you.

And this will help you to determine whether your employees actually understand what the strategy is. Because here's the deal: You can have the best strategy in the world, right? You could have it written down on a piece of paper. You can put it on a poster and hang it in your break room if you want. But if your employees don't understand what it is and how it relates to their day-to-day behaviors, then it's just a bunch of words on a piece of paper. It’s not actually changing behaviors and driving value in your company.

This is the biggest problem that I see — that employees don't even understand what the strategy is. So therefore how can they execute? And in fact, executives — people that are sitting in the strategy development room — a lot of them, they don't even know what the strategy is. And they're the ones that are crafting it, because it could be so like black box, like so mysterious, or it could be so complicated that at the end of the day, after the strategic retreat and you get back to the real world, employees lose their way.

So this was me, all right, as a CFO of this billion-dollar company. And literally we had a company-wide meeting. So we're presenting this from our main office in Dallas. And we also had our other offices — Boston and Chattanooga — on Zoom calls. So they're on a video call while we're announcing the strategy, while we're rolling this out. We went through our strategic problem. We talked about our initiatives. We talked about our competitive advantages. We talked about it all. And I thought I was crystal clear on what our strategy actually was.

Fast forward. I make a trip up to Boston — our Boston office — and this was right after this meeting. And I found somebody in the hall and I went up to them and I said, “Hey, you know, what are you working on? What are your priorities?” And then I said, “What do you think the strategy is for our company? So tell me back in your words.”

And this individual said something and I was like, “You are so far off.” But I wasn’t blaming that person and I wasn’t trying to shame them. I didn’t even say that to them. It’s not like I was like, “Oh, you’re way off. You're an idiot.” I didn’t say any of that. I just thought to myself, “Wow. I failed as a leader.”

Because if I’m the one responsible for rolling out this strategy across our company and our employees don’t understand what it is, that’s my fault.

So you could have a really good strategy. You could follow a really great framework. But if employees don’t know what it is — and like I said — if they don’t know how it shapes their day-to-day behavior on the front line, or when they’re making decisions about getting work or estimating or doing marketing and sales or managing people or hiring people — whatever their daily tasks are, they’re serving the customer — if they don’t know how the strategy relates back to them, it’s not going to be executed.

Which leads into my second piece.

All right. This is the second way to know whether your strategy is working: You need to determine whether you have a competitive advantage. I’ve talked about this before. I did a conference a while back and there was a room full of executives and I said, “Raise your hand if you believe you have a competitive advantage.” And sure enough, the majority of the room — they shot up their hands, they’re like, “Yep, we have a competitive advantage.”

And then I said, “Let me explain what it is.” A competitive advantage is one where your company earns above industry average profits. So if you’re earning above industry average profits, you have a competitive advantage. And the majority of the room — they dropped their hands after I said that. Like, “Okay, that’s not us.”

So that’s a really good test for your strategy and to determine whether your strategy actually needs a strategy. Because if you’re not earning above industry average profits with what you’re doing, then you’re just like playing games with yourself and you’re just tricking yourself.

So this is what I realized a while back when I was at Ernst & Young working in public accounting. This is when the light bulb went on for me. Because executives — they would talk about strategy. They’d put stuff up on the wall. They’d hang it in the break room. They were like, “Yeah, we have a strategy. Rah rah rah.” And they’d get everybody all riled up and excited.

But then the finance teams were building out these models and these forecasts. Basically they’re just inputting numbers that leadership said, right? So they’re like, “We’re going to grow 20% with our strategy.” So they would forecast out growth at 20%.

But then when we looked at the actual performance, the company wasn’t earning above industry average profits. In fact, their competitors were crushing them.

So that’s when I realized you could have strategy all day long. You could have mission, vision, and values spread throughout your company. Whatever system you’re following — you may think that you’re getting traction — but it comes down to tying back in the financial piece to your business.

So if you look at your bottom line and you look at that profit compared to the percentage of revenue, and then you benchmark yourself against other competitors in the industry — and if you’re not above them — then you don’t have a competitive advantage. It doesn’t mean you’re terrible or your company is going to fail. It just means that the strategy that you’re trying to roll out and the strategy you’re trying to execute on isn’t driving better financial performance.

Okay. So you may be okay with that. But I think a lot of companies are trying to win with their strategy. Or they’re trying to get their company to go somewhere. And if it’s not earning above industry average returns, then you’re just playing to play just like everybody else. And that includes you’re playing with companies that don’t have a strategy. You’re just earning average returns.

All right. So that’s test number two.

Test number three — it’s a little more technical, but you totally have this. You’re smart — is determining whether your strategy is creating value for your business.

Now let’s not get all confused about value or think it’s some abstract term. Really when it comes down to value, it’s the amount of cash flow your business is generating over a certain period of time. In fact, Warren Buffett, the greatest investor of all time, he said value comes down to this definition: it’s intrinsic value — it’s the present value of all the cash that a business is going to spin off over its remaining useful life.

And that’s how you determine the intrinsic value of a company. That’s how stocks are priced. And that’s how other assets are priced as well. It’s based on their cash flow.

Now, one easy measure you can calculate in your business to determine — not only do you have a lot of cash flow — but are you earning enough of a return based on your invested capital is this: it’s your return on invested capital compared to your cost of capital.

So return on invested capital can be computed by taking your net operating profit after tax and dividing that by your invested capital.

Invested capital could be found on your balance sheet. You take current assets minus current liabilities. Just make sure you subtract out excess cash from your current assets and don’t account for your interest-bearing liabilities. So take those out.

So it’s current assets minus current liabilities. That’ll tell you your working capital.

And then look at your net property, plant, and equipment. This is your investment in trucks, trailers, tractors, the building that you office out of — whatever — all the assets to run your business, less accumulated depreciation.

All right. So that’s your net property, plant, and equipment. Add those two together and you get invested capital. There’s some other nuances, but just start there.

So net operating profit after tax divided by your invested capital, and you’ll come up with return on invested capital.

Now you may be wondering what’s a good return on invested capital. Well, I like to look at the stock market — and over the last 50 years, it’s returned on average 9 to 10%. So let’s just take 10% for a nice round number.

If your return on invested capital is less than 10%, that means you’re underperforming compared to the rest of the market. So if you took your money out of your business — you just liquidated your business, I’m not saying do this — but if you did, theoretically, and you put it in the stock market, you can earn 9 to 10% returns just passively.

So you want to earn a return at least of 10% or greater to compensate you for all the headache that’s associated with running a business. Right? Otherwise, like I said, you just invest in the S&P 500.

So your return on invested capital should be above 10%. A lot of the businesses we work with are in the 20% range. Some of the higher performers are in the 50% range. It just all depends on your company and your industry.

But let’s just say your number is 15% and you’re like, “Wow, that’s really, really good.” The second part of the equation is you have to account for your cost of capital. So you have to look at your cost of equity and your cost of debt.

So I won’t get into the calculation to confuse you. If you’re not familiar with this, you can search weighted average cost of capital — WACC. I think I have other episodes on my podcast and on my YouTube channel about WACC and how to compute it.

So that’s your weighted average cost of capital. And let’s just say it’s running high at 12%. That means if you take your 15% return on invested capital minus your weighted average cost of capital — so 15% minus 12% — you end up 3% net positive, which means you’re creating value in your business, which also means that your strategy is working because it’s creating value in the process.

So strategy doesn’t have to be abstract. It doesn’t have to be theoretical. I walk by conference rooms all the time and I see teams huddled around a whiteboard and they’re writing down all this stuff — mission, vision, and values — which is not bad. I’m not poo-pooing that. You should have some type of purpose statement in your company. We do that too with our strategy framework. Purpose is a really important element in a strategy.

But don’t stop there. Make sure your strategy is super clear about what does winning even look like? What’s your market focus and position? What’s your competitive behavior? In other words, what’s your structure? What’s your operating model for your business? And then what type of resources and returns are going to be required to execute the strategy? And what can you expect as ROI on the strategy that you’re implementing?

It doesn’t have to be super complicated, but it does have to be complete. And that’s the key.

I created this four-part growth blueprint for this exact reason. I’m going to put the link down below in the description. So be sure to check it out. It’s totally free. You could go to coltivar.com to find it as well.

And in the blueprint, it walks you through exactly what you need to know to grow your business. And here’s the thing — when it comes to strategy, you want to grow your company, right?

But if you don’t know your sustainable growth rate, just like you don’t know if you have a competitive advantage or you don’t know your return on invested capital, if you don’t know this growth rate and you go and grow your business — well, guess what? If you don’t also have capital to sustain the growth, you go out of business.

So I created this calculator. It’s free. It’s easy to use. All you have to do is plug in a few numbers and then you’ll get your sustainable growth rate.

And that’s all in the four-part Coltivar growth roadmap. So be sure to check that out. But this is a great starting point. It’s a very valuable tool. My team and I have spent a ton of time putting it together for you so you can get your free copy.

But that will help you with your strategy. And it’ll help you to think through certain things in your business.

So let me just…

So let’s jump into…

In fact, Warren Buffett, the greatest…

In fact, Warren Buffett, the greatest investor…

I created this four-part…

I created this four-part.