No serious business owner or executive opposes increasing profits. People do argue about how to generate the profits that create free cash flow. Many an owner or executive has lamented their difficulties earning a profit from every sale. Whether it’s customer demands, competitive pressure, or a sub-optimal sales process, profits can be elusive.
Today we turn to the Money Matters topic “How to Generate a Profit.”
Profit is the ultimate outcome of strategy. There are two aspects of strategy:
- The company’s overall strategy (What business is it in?)
- Its formula for profit making.
Let’s start with the second aspect first.
The typical formula is Revenue-Expenses=Profits. This states that profit is what’s left over after deducting expenses from revenue. That makes profit an afterthought and subject to being reduced due to revenue reductions or variations in expenses.
We use the formula Expenses+Profit=Revenue. This makes profit a requirement to be covered by the price, just as expenses are. Profit is its own category, not a leftover.
This formula then makes clear the need for what we’ve termed “Strategic Statements” –not just strategy.
Strategic Statements force your company to analyze each division or sector, and each offering within a division or sector, to articulate the profit required from every sale.
Here are 3 examples from one of our clients, a firm whose overall corporate strategy is “We provide IT consulting to banks for Z% profit.”
This company’s customers are in different banking sectors. To ensure that they generate the profit required by their Strategy, they wrote the following Strategic Statements:
A. We deliver secure cloud-based data processing platforms to Community banks with up to $35,000,000 in annual deposits for 11% profit.
For a different banking sector, they wrote this:
B. We deliver secure cloud-based data processing platforms to Regional banks with between $35,000,000 and $75,000,000 in annual deposits for 13% profit.
And for a different value delivered they wrote this:
C. We increase the analysis speed of loan applications for Community banks with up to $35,000,000 in annual deposits for 10.5% profit.
Do you see how they clearly identified different customer sectors (examples A & B) and how they separated out one service (example C)?
Using all their various operations and financial tools, they can track their success meeting these profit requirements. They can see weekly how they are doing. They can adjust their marketing, sales, pricing models, and services as needed. There are no surprises at the end of a quarter or a year.
Are You Delighted by your Company’s Profits?
If you’ve taken the Strategic Statement approach to company profits, then you should be delighted each quarter and each year. If not, you can start immediately. Waiting until the “time is right” guarantees you’ll continue to get what you’ve always gotten–profits that leave you short of free cash flow.
Strategic Statements are powerful for companies whose services are based on intellectual property.
If you’re tired of disappointing profits, schedule a complimentary call with us. We take the time to learn more about your company, about you as the owner, and what you’d like to accomplish in the coming 6-18 months. You might hear some good news and you might hear some bad news. Following this opening conversation, we will agree on next steps. There is no sales pressure, there is only exploration. Email or call 703-801-0345. Your profits could appear sooner than you think.