“The goal of this business is to make money, of course!” responded the owner. Then we asked a few more questions.
- How do you involve your team in efforts to improve profitability or has this mostly been the job of management?
- Beside yourself, who else is given incentives to improve profitability?
- How aware are your people as to what areas most affect profitability, such as pricing concessions, controllable expenses etc.? Are you able to prioritize, quantify and communicate to the team to what extent the top areas of profit drain are within your business?
- What types of business, customers, products, services etc. yield you the greatest profitability? Is your sales team aware of these and are there incentives for them to sell profitably? How are you coaching them to effectively helping to move more business toward the more profitable areas?
What we find with our clients is that tremendous increases in profit can occur by implementing a process around improving profits. Here are a few strategies that can help to create results around increasing profits.
It helps if you can determine incremental awards or incentives around ideas that improve profits. We’ve seen rewards given as a percentage of money saved and thus tens of thousands of dollars with a potential cap as well as simple small cash or gift card awards for any and every idea that has an impact on profitability. Determine an incentive program that you can live with and deliver upon regardless of how voluminous the profit improving ideas may become. Back up monetary rewards with genuine praise and gratitude; this can be in written or formal spoken expression.
Not that selling your most profitable products and services is always the highest priority, but it will help if you show your team the rankings of how your products and services stack up in regards to profits. It also helps to show as many areas of costs that may have any potential for improvement. Don’t limit these areas to just the immediate areas of responsibility of the employee, but rather allow their creativity and awareness of what is happening on the front lines of your business help to innovate completely new solutions or incremental savings no matter how small.
Encourage even the smallest of savings. Even if just 15 employees came up with 15 ideas that each increased profitability by an average of just .05%, that could in some cases work to double the profitability of a company.
Often the greatest drains in profitability occur in the selling process. Sales people often are unaware that even just a one percent price concession is frequently well over a 10% reduction in profitability. Training your team to sell on value and to negotiate options and the estimates of what your solutions stand to deliver are just a couple of ways of inoculating your team from profit draining price concessions.
There are the Seven Essential Areas of Objectives in the strategic and implementation process (for a free Strategy Handbook email us) and while Profitability Objectives are of the lowest priority according to Peter Drucker it is still always essential to have specific profitability objectives. Like all objectives they must be measurable on a regular basis, preferably at least monthly. There needs to be clear accountabilities and at least quarterly points at which progress will be measured and discussed.
Involve your whole team in setting and executing upon the objective of improving profitability and you will get far more accomplished than doing it alone.
On the other side of the “profitability coin” consider these questions: What is your goal when it comes to profits for your business? Is it to maximize profits? Is it to make as much as you reasonably and ethically can make while delivering as advantageous product and service set as you can to your customer?
The fact is aiming to make the “maximum” is exactly the opposite of what you need to be aiming for. The fact is that if you ask what your human, physical and financial resource requirements are in order for you to grow enough to secure your future and vision, the right question to ask is something completely different. The right question to ask is:
- “What is the minimum we must make in order to achieve all of the above objectives and sustain the necessary growth our organization requires to realize our vision?”
That’s right, the minimum. The fact is that the minimum “profit requirements” may be more than what you current “maximum” target may be.
Another fact about “profit” is that there is no such thing; there are only costs. A problem that we have in society today is that both the non-business and business sectors have a delusional view about this thing we call profit. But we can’t blame government or the public for this delusion; we must blame business leadership/ourselves for not making this clear both to our teams and to the public.
We must make clear that there are no profits, but only costs, and we must understand what those three kinds of costs are.
First there are the factors of production, i.e., the necessary resources to produce and deliver: i.e. labor, physical resources and capital. When you have properly conducted your strategic thinking and visioning for the business, and you have thought about what the optimistic potentials for growth may be as well as the most likely potentials for growth, you can immediately begin planning for likely resource requirements for sustaining such paths of growth. You must list out your growing human resource requirements, potential new physical resource requirements and their costs and perhaps even the cost of capital. When all these required costs are tallied, only then can you begin to determine what today’s profit requirements are so that you may be competitive in the future.
Second there is the cost of future jobs and pensions. Business earnings whether they are kept inside the business or paid out into the capital market are the key source or fuel for future jobs and the largest source for future pensions.
Third profits are needed to compensate for future risks and uncertainty. No leader can predict the future. The odds are always in favor of some loss or adverse condition in the future, therefore it is critical to withhold profits for the inevitable future losses, costs and changes that are risks and uncertainties that no one can predict.
The above thinking is de rigor for any strategy and implementation process. If you have recently completed a planning process and didn’t determine future resource requirements and thus the minimum profit requirements to maintain an optimal growth trajectory, then you didn’t really complete the first steps of the strategic thinking process.
What is fascinating is to watch how much faster companies grow when they’ve adequately planned for future resource requirements and when they have repositioned the perception of profit both at the leadership level and throughout the team. This inevitably leads to great improvements in innovation and new profit.
Your first responsibility is to make enough profit to cover the costs of your business’ future, if you don’t, then there is no future for your business nor for all that it may be able to offer to your community and society.
Mark Faust, founder of www.EchelonManagement.com is a growth & turnaround consultant, CEO/board coach and professional speaker. He can be reached at: Mark@EM1990.com 513-621-8000 @MarkFaustSr His book Growth or Bust! Proven Turnaround Strategies To Grow Your Business is available at all Barnes and Noble stores or contact 513.791.5158 or MDavis@BN.com for quantity discounts. He has been a member of over a dozens of boards and currently sits on the boards of Megen Construction, Hagie Manufacturing and two high tech ventures.