'It is a socialist idea
that making profits is a vice;
I consider the real vice
is making losses.'

Sir Winston Churchill.

No business can survive
without making profits.

 

OU hear a lot of discussion about business and profitability in popular executive watering holes. In fact, it's the favourite topic of conversation in all places where business people gather. The most common theory punted by management types is that people establish businesses for the sole purpose of making profits.
  
Most business gurus agree that all businesses strive to earn maximum profits. And most business people formulate their policies around this profit motive.
  
Marketing academics call the process 'profit maximisation'. The object, they argue, is to make as much profit as possible ... a desire to earn a rapid return on investment.  Or, more bluntly stated, to charge all the traffic will bear.'
  
Drucker shoots down conventional theory in flames.  He says that it leads to a false and irrelevant premise.
  
While he agrees that profit and profitability are crucial, he claims that profitability is not the purpose of business. Indeed, it's a limiting factor.
  
'Profit is not the explanation, cause or rationale of business decisions, but the test of their validity. If archangels instead of business people sat in directors' chairs, they would still be concerned with profitability, despite their total lack of personal interest in making profits.
 
'The first test of any business is not the maximisation of profits, but the achievement of sufficient profit to cover the risks of economic activity and thus avoid loss.'
  
If you break even, you're okay, says Drucker.
  
I don't think so.
  
I think Drucker has it wrong. If you continually break even, you're going nowhere. If you go nowhere, you're quickly going to be overtaken.
  
And that spells d-o-o-m.

SO WATCH YOUR BOTTOM LINE

Because if you don't, you're dead.

Whether your run your own company or manage a project, you're responsible for making your unit a self-contained profit centre -  that is if you want to survive.

As I point out in I Was Your Customer, if you listen to what your customers want and add value to your product or service, they won't quibble about paying a modest premium.

Forget about
low-margin trade.
Focus on what your
customers really
want.

How American entrepreneur Bill Kimpton runs his chain of hotels proves my point. He listens to what guests want, gives it to them and reaps the rewards.
  
Since he broke with traditional hotel practice, which offered guests what hoteliers thought they wanted, his 19 hotels earn consistently good profits.
  
Kimpton discovered that most hotel chains promote entertainment. However, most hotel guests want just a decent bed in a clean room with access to
en suite bath and toilet facilities.

So Kimpton sells a good night's sleep without frills. He reckons the expensive and under-utilised trappings of entertainment  -  glitzy ballrooms and overpriced restaurants  -  merely load the cost of sleeping, and they drive customers away.
  
S
o, if you want to stay in business ...

THINK AND EARN PROFITS

 To improve your bottom line performance, follow my five-point plan.

  1. Draw up a budget.
  2. Outsource as much as possible.
  3. Study your balance sheet.
  4. Trim the flab.
  5. Retain old customers.

DRAW UP A BUDGET.

Herbert Clark Hoover, when President of the United States, described a budget as: 'Telling your money where to go instead of wondering where it went.'
  
You can't calculate profit margins until you know exactly how much whatever you do will cost you to produce.
 
Old Sam, a wheeler-dealer, who's poor on education but high on rudimentary economic know-how, runs a street stall in downtown Johannesburg. He imports and sells watches and became rich very quickly.
  
'You must be making enormous profits,' a neighbouring stall keeper said.
  
'Not really,' Sam said. 'Only 4%.'
  
'Only 4%?'
  
'Certainly, only 4%.'
  
And Sam explained his simple but effective formula.
  
'I buy the watches for R10,00 each and I sell them for R40,00 each.'
  
Although Sam's arithmetic is faulty, he based his formula on the old adage that profit is the difference between buying cheap and selling expensive.
  
At the turn of the century, an eager young man solicited the advice of the late Bernard Baruch. Although still a young man himself, Baruch had already become a financial tycoon.
   '
Tell me, is there any sure-fire way to make a million dollars?' the youth asked.
  
'Yes, there is one sure-fire way, 'Baruch replied. 'All you need do is buy a million bags of flour at a dollar a bag and then sell them for two dollars a bag.'
  
Unfortunately, it's not as simple as that in these sophisticated times.
  
If you're going to compete effectively without going broke, draw up your budget to take into account every factor that impinges on the cost of your product or service.
  
Since I'm not a professional bean counter, I'm not going to give you a lecture on the finer points of accountancy and auditing. I'm simply going to indicate a few areas that are often overlooked when it comes to trimming costs in order to remain competitive.

One that bears investigation is logistics.

Poor logistical organisation can add to costs, claims Pieter Nagel, manager in charge of group logistics at Sasol.

Managers only tend to look at parts of logistics, like transport, in isolation. They should regard it as a total function, like marketing and finance.

Management doesn't
pay enough attention
to the discipline,
which can lead to
better control
of product costs
and delivery.

Because it's involved in the entire chain of manufacturing and distribution, logistics is one of the most substantial cost drivers in business.

In the case of some manufactured goods, it can account for up to 60% of the selling price.

So, if you want to deliver the right product at the right time to the right place at the right price, you need to ...

Smash the logistics jam

To achieve this, says transport and warehousing fundi Peter Franz, of Andersen Consulting, invest in an efficient electronics communications system that provides accurate, up-to-the-minute data.

And you need to act on it.

Quickly.

You may also be able to substantially trim costs by ...

OUTSOURCING AS MUCH AS POSSIBLE.

Under-utilised in-house facilities are costly to buy and expensive to maintain. They also occupy valuable space. In addition, swift technological advances make yesterday's tools slow and inefficient.

In effect, you only pay for what you get or use. When you 'farm out' tasks, you save on the cost of ownership and the substantial costs related to the employment of the people required to do the work.
The beauty of outsourcing is that have access to high levels of specialist expertise without becoming involved in the hassle factors of pension funds, medical aid, and leave, amongst others.

There's another form of outsourcing that you should know about.

Cost-conscious companies often find that the outright purchase of equipment, which they use continuously, unproductively ties up capital that can be used more productively elsewhere.

So they resort to leasing
  
Put simply, the full-maintenance leasing of vehicles and machinery and other equipment limits your exposure to the
costs of maintenance. And it prevents  you being stuck with rapidly depreciating, out-of-date assets.
  
And lease fees are fully tax deductible.

You'll often find
that outsourcing
certain functions
costs you less
and gives
you more.

While your budget sets out your financial parameters and objectives, you'll get the best indication of your company's financial health by ...

STUDYING YOUR BALANCE SHEET.

If you want to know how well you're doing, or the extent of your failure, don't look at your income statement. This merely reveals changes in sales or net income. Instead, turn to your balance sheet.

If you're doing well, it'll indicate a positive relationship between assets and liabilities. It'll also show you how effectively you're using your assets.

So get a snapshot of exactly how your business is performing now ...

LOOK AT YOUR BALANCE SHEET

Your balance sheet may often reflect a picture you don't want to see. A sagging bottom line, for instance.

Resist the temptation to launch an immediate cost-cutting spree.

Trimming your spending may make your bottom line look marginally healthier. But only for the short-term. In the longer term, demotivated staff lead to dissatisfied customers and probably a loss of market share.

Slashing costs can detrimentally effect your ability to deliver superb quality and galaxy customer service. And that can make your bottom line look positively anorexic.

Before your start slashing, do some research. Find out what your customers really want. And give it to them.

This mean that you may have to increase expenditure rather than cut it.

TRIM THE FLAB

Not just once over lightly, but heavily. Get Real. Really slice off unnecessary flab. Dissect your company from the top down in a surgical operation designed to remove who and what doesn't work.

Refocus on
your strategic goal.
Then spend
whatever it takes
to achieve it.

Take a personnel inventory in almost any company you visit. Most employ more people than they need. Few of them can give you a succinct description of what they do.

Or why they do it.

Like members of the bloated civil service, most of these people are under no pressure to perform. They pitch up at work each morning and clock in only so that they can collect their pay and the end of each month.

You'll find these people at every level of the corporate hierarchy.

Psyche them out. Shatter their so-called comfort zones. Give them their marching orders. Retrench them. Stab them in the back. But get them out.

Each department in your company must have a valid reason for its existence. And each person in each department must supply a valid reason for his or her existence.

There are only two valid reasons for in-company activity. Adding value that leads to customer delight. Or helping to add that value.

Any other activity is superfluous.

Sixty-five per cent of all in-company activity in the UK is merely 'busy work'. It accomplishes nothing. A further 30% of the activity is necessary, although it doesn't directly add value. Examples include bookkeeping and financial services, maintenance, administration, warehousing or storage, inspections and transport.

They cling to
the belief
that the
company owes
them a living,

And what doesn't add value or contribute to adding value erodes profits. Here are a few of the profit-eaters that we could all do without: defects in manufacturing, delivery errors and long lead times.

If it doesn't make profits, it has no place in your operation. Neither have the losers who, despite their poor or non-performance, still expect automatic pay increases and annual pay rises.

So what's the answer?

Get rid of the deadwood. And structure salary packages to reflect performance. Then watch your bottom line results improve.

And if you're still looking to improve the health of your bottom line further ...

On average,
only 5%
of company activity
adds value
to products
or services.

RETAIN OLD CUSTOMERS.

According to a rule of business thumb, it costs about five times more to find new customers as it does to retain your existing customers. It's also a lot cheaper to reclaim old customers.

Going out to seduce new customers usually means you have to plough serious money into advertising and promotions, both of which grow more expensive by the day.

The cost of retaining existing customers and ex-customers, 68% of whom ditched you because you provided indifferent service, is negligible. Essentially, it means you must jack up your level of service until it is of world class.

I go into how you can attract new customers, retain your existing customers and reclaim former customers in my book, I  Was Your Customer.

Remember, a sluggish, unhealthy bottom line reflects a sick company.

SO KEEPING PUSHING THE PROFIT BUTTONS

And while you keep your shoulder to the wheel...

keep your ears on the ground.

Previous   Next

  Authors Note
    Introduction: Prepare Yourself for the New Business Order
     
1. The Evolution of Change
     
2. Give your Company a 'New Look' Profile
     
3. Run Your Own Show
     
4. Lead, Don't Manage
     
5. Cross Train Yourself
     
6. Become a Self-Contained Profit Centre
     
7. Think Network
     
8. Benchmark Yourself
     
9._ Have Heart
     
  Return to FunZone!