Long term survival of every commercial enterprise is dependent on one thing, and one thing only: Consistently being able to make a profit sufficient to ensure that the owners are prepared to continue to have their capital in the business rather than moving it elsewhere.
This simple observation applies to the corner store as much as it does to the current incumbents of the Fortune 500.
No initiative developed for a commercial enterprise is worth the paper it is written on if it does not articulate how, in the long term, the businesses shareholders will be better off as a result of the plan being successfully implemented.
This reality should inform the way every activity, from strategic planning down to minor improvement projects are developed.
Ask 6 simple, but often confronting questions:
Will this initiative sell more?
This is not about price, it is simply about volume. If you can sell more at current prices while maintaining margins, you are in with a shot.
Is the sales mix maximised?
This question goes to the mix of products sold. Selling is a resource intensive activity, and managing your product portfolio for the best outcome from the resource investment made will deliver results. Every business I have ever seen has products that deliver a range of margins from differing customers and customer segments. It is often challenging to alter the mix of products, channels, and customers serviced, but only by doing so can the profitability be maximised over the long term.
Can you increase the price?
Warren Buffett, who knows a bit about long term profitability says, “The single most important decision in evaluating a business is pricing power. If you have the power to raise prices without losing business to a competitor, you have a very good business. If you have to have a prayer session before raising the price by 10% then you have a terrible business’. This is a piece of wisdom that will serve you well.
How can you reduce costs?
Almost every business I see these days is cost sensitive, but too often that sensitivity is disconnected to the productive outcome incurring the cost delivers. Any time there is an across the board cost reduction of a percentage mandated, it is a reason to run for the hills, as it is a short term Band-Aid that bears no relationship to the returns. A thoughtful cost reduction regime will over time identify and eliminate the sources of waste in the business, activity that does not add to profit. In manufacturing businesses there is almost always excess inventory held, and rework that becomes necessary to fix a problem. Eliminating the causes of both will reduce costs.
How can you increase productivity?
We all understand the notion of leverage, doing more with less. In a business when you figure out how to do more with the current investment, or alternatively reduce the investment while generating the same level of outcome, you have increased the productivity of that investment. This is more than, but closely associated with the reduction of costs, but it looks at the outcome of a cost incurred, rather than the dollar amount of the cost itself.
How will that investment increase profit?
There are many tools accountants use to justify and choose between investments, IRR, ROI, being just two. However, they all rely on assumptions of future cash flow in some way. If you expand the thinking a bit, it often pays to invest in less obvious areas. A former client had great difficulty finding a specific set of skilled trades, and spent a fortune advertising and on labor hire firms with poor results. They invested in two areas to solve the problem: They increased their salary rates way beyond the so called ‘market rate,’ and they invested in the skills their workforce had. The result was a significant reduction in staff turnover, with attendant cost savings and productivity increases. The investment over time was a very good one indeed, spending money to make money is not always obvious, but it does work.
The answers to these questions are not often obvious. Finding answers you can bet on, which is what you are doing, requires deep consideration, experience, domain knowledge, and experimentation.
Header: The thinker. August Rodin
