What’s Profitable, What’s Not!
So you start looking at the financial reports and the first thing you seek out is the profit. If it’s over or close to budgets, targets or expectations then you’re almost ready to move on. Of course you will look further and try and analyse some trends, see where we might be under-performing or where overheads might have blown out. Now if we are short on profit then the analysis begins, you have to dig deeper to find out what is going on, sound familiar!
We all have different approaches to looking at the results and profit may not be the most important figure to look at but it is the lifeblood of a business. As a result the make-up of profit is a vital factor in running a business and understanding how it is derived just as vital. Now you can’t make profit without a top line and revenue growth is still very important. Your planning might be to forgo profit to increase your revenue base. This is part of the on-going life in business for most companies who are in it for the long haul. However even during these times taking the eye off the ball can be wasteful at the least and disastrous at the worst.
So what do I mean by the make-up of profit? Well having delivered business software to hundreds of businesses I can tell you it is depends on the activity. For even the most common business of buying and selling stock it can vary, sometimes the gross profit can be very strong but the number of people to deliver the results is too high or the cost of transport not recouped is killing the profitability. Aged stock may be sitting on the shelves never to be sold and needing a big write-off. In a services organisation the amount of non-productive time, managing fixed price contracts or difficulty in project management can hurt the bottom line. It would be fair to say that in a competitive market profit is continually eroded by customers, staff, suppliers and the market as a whole. Having systems that help look at all aspects of the business to determine how profit is determined at a lower level is vital.
What I have found is that those businesses who understand how their profit is derived and have systems to measure the different facets of that profit achieve more. We can all accept that it is virtually impossible to run a business without systems to manage the processes or at least generate invoices and record costs. When we look at all the costs to support making profit including people, offices, warehouses, transport, communications, infrastructure and finance costs, the business systems costs are a small fraction. An increase in that small fraction could have a large impact on the profitability just by measuring it well. In the words of a famous business performance guru:
“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.” H James Harrington