Managing for profitability involves employing one or more techniques for optimizing returns to meet strategic objectives. In no particular order, this generally incorporates four (4) essential elements:
- People – in many businesses (including ours), having good people and good managers are key to being successful. Good managers are coaches, not critics. A manager that is a critic (especially in front of others) will never get 100% out of anyone and is in fact an impediment to the organization. No matter the technology or processes you implement, you still need talent to execute and make decisions. Organizations with good people management typically report higher revenue than their competitors. Hire good people and then let them do their jobs without being micromanaged on every decision.
- Software – software is a key component of any profitability management initiative. Good business software can help determine optimal pricing, production, and even incentive compensation. Slow moving inventory is like cash sitting on a shelf not making you any money. If a product is not working out, sell it at a discount (even down to cost) and then move on. For wholesalers, using software to capture manufacturer’s rebates is critical to profitability.
- Information Technology and Analytics – how profitable are your customers and products? Are you generating 80% of your profits with 20% of your products? Being able to focus on increasing sales of items with higher margins can dramatically improve your cash flow. How is your organization performing? Are you ahead of last year?
- Strategy – are you fulfilling the right niche for why you are in business? Successful businesses are supplying a need in the marketplace for what customers perceive is a fair value. What is the company best at doing? Focus on your company’s strengths to find a way to differentiate yourself from other competitors.
There is a huge difference between managing a budget and managing profitability. Most businesses are unprofitable in some part of their business and have other parts of the business generate profits that subsidize the losses. Failing to focus on the profitable core of the business is a common mistake. Having higher revenues certainly helps profitability, but even better is a sales force that focuses on securing and growing the profitable core.
Are you missing opportunities for operational improvement? For example, most successful restaurants have a separate cash register for carryout sales. Do your processes require associates to take extra time completing customer orders? For example, good warehouse management is to have high turnover items stored close to shipping, improving labor efficiency. Make sure your equipment is up to date. Outdated equipment can slow the job completion process. Improving operational efficiency can boost profits.
At Jones CPA Group, we’re more than a public accounting firm. Since 1979, we’ve built a reputation as accessible professionals who help our clients improve their profit margins. Stephen M. Jones, CPA, ABV, AEP can be reached at firstname.lastname@example.org.