What Does Profit Reveal About Management Effectiveness?

Profit tells you how the company is being managed. It is the definitive measure of a privately owned services or knowledge based company.

Is this a “duh” statement? I don’t think so.

It’s easy to get caught up in the day-to-day activities and lose sight of the fact that privately owned firms are the embodiment of the owner’s beliefs, values, and skills.

No matter how large or diverse the C-suite or the org chart, the Owner is the captain, navigating the way forward. As such, the owner has the most profound and pervasive impact on the company. This is true if the Owner is a single person or there is a group of Partners.

What does it mean that profit (net profit or EBITDA) reflects management effectiveness?

Profit It is the purest reflection of the day-to-day workings of the company. Let’s look at the top 2 management decisions that are reflected by net profit.

1) What business is the company in? The most straightforward expression of strategy is this: “We deliver X outcomes to Y buyers for Z profit.” If there’s a lot of profit, you understand that you have effectively identified both the value delivered and the buyers who want that value. If there is little profit, you have not. The single largest cause of business failure is lack of market demand.

It is the owner(s) who either changes the value delivered or changes the target market in order to fulfill market demand and increase profit.

Two well-known  companies provide meaningful lessons to the owners of privately held services companies. Kodak’s leadership dismissed the evidence that their buyers were moving away from film and into digital. That is management failure. IBM realized that copiers are commodities, and that consulting is their future. That is management success.

The lesson is the same no matter the size. Meeting market demand is the single most critical choice owners make.

2) Is Ownership decision-making ensuring the synchronization of every component to create a whole that’s greater than the sum of its parts?

revenue and profit growth

We use this analysis tool during planning retreats with company owners to measure every component of the company and how well they’re synchronized. Owners see at a glance what is needed and what happens if one element is missing. We do this before recommending any changes. We want as many changes as possible to reflect improved management effectiveness.

These planning retreats most often surface two critical disconnects:

  1. Between its brand and its focus, which is the collection of services and products that deliver value to the buyers. If your brand is expertise, it’s poor management to offer commodities, loss leaders and purported high value at big discounts.
  2. Between marketing and leverage. Leverage means that the company invests heavily in its existing clients and customers to sustain a long term, valuable relationship. If the company invests the preponderance of its funds to attract new prospects, there isn’t enough money left to leverage existing clientele.

When the company leverages existing clientele, it increases revenue and decreases expenses. What better reflects effective management than that?

Planning is not for January only.

I subscribe to the idea that companies can chose to start a “new year” at any time. If you think you’ve missed your opportunity to write a strategic plan for 2021, think again. Now is the time to do it!

  • Measure your current state and identify the disconnects
  • Write a plan to connect the gaps and build on your strengths
  • Increase profit immediately and through the year

Each strategic planning retreat is customzied to the specifc client. Give me call to explore what will work for your company.

Keep the conversation going!

Thanks to the readers who wrote with their thoughts and comments on last week’s newsletter. I reply to everyone and encourage you to write me at any time.

Also take a moment to join my network on LinkedIn. I will accept your connection request. I have many knowledgeable and smart connections and we share ideas and learn from each other. If you’re not active on LinkedIn and want to increase your reach, I encourage you to start now.

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