Are You Profitable? Not sure? Let’s Start the Discussions.

Are you profitable? That is the question. For most leaders, at a basic level profit means that there revenue covers their expenses with some dollars left over. Pretty basic. The idea of creating metrics based on profit is not as basic.
​
When we dig into profitability, some questions deserve exploring.

• Are your expenses valid?
• Are your salaries or hourly rates what they should be and are they appropriately allocated? This question is especially necessary for generational family businesses.
• How satisfied are you with your COGS?
• Do you understand Gross Profit versus Operating Profit versus Net Profit Margin?

Digging into these questions will undoubtedly create additional assessments.

To truly understand profitability, you will need to dig into your current COGS calculation. There is no reason to tie metrics to gross profit if you aren’t sure that your COGS is accurate. While you may be thinking, “we better know that” there are reasons why your COGS may not be correct. Ultimately it may come from:

• Inaccurate Reporting of Labor
• Erroneous Reporting of Expenses
• Incorrect Inventory Costs
• Lack of understanding of how a “task” is associated with an item or service sold (this is part of determining Operating Profit, which = Gross Profit – (Operating Costs, Including Selling and Administrative Expenses)

If you are pretty confident that your COGS and operating costs are accurate and allocated adequately, then you can use Gross Profit or even Operating Profit as a critical metric.

However, most of us need to dive into the above bullet points to create metrics that drive true profitability. This digging is where the rubber meets the road.

Let’s look at four leadership discussion points that you may be able to use to create meaningful KPI’s (that drive profitability). 

• Validate your data and update your technology. For many companies, especially those manufacturing or distributing products, inaccurate reporting is the result of living in a spreadsheet nightmare, or with a homegrown system. Bad data and outdated technology lead to inventory mismanagement and improper COGS calculations. If this is you, it may be time to consider a new ERP system. Focusing on your data accuracy combined with the selection and adoption of new technology can dramatically improve your decision making. The better your data, the better your results. If you can’t get two years of data quickly – it’s time to upgrade. 

 

• Competitive Analysis. It may be time to get to know your competitors. What are they charging? If they aren’t charging more- is there a way to explore how they may be creating a similar output with fewer expenses? Build leadership KPI’s on exploring the competitive landscape and implementing what you learn. 

 

• Reduce Expenses and report them accurately. I’ve seen change leadership put into place for nothing more than finding ways to reduce costs. Task your leadership team by looking at their departments and bringing potential waste to the table with lean and six sigma. This process usually involves decisions like outsourcing areas where you are weak and re-evaluating any complex expenses. The sales process is always an excellent place to start. Tie KPI’s to expense knowledge and reduction. 

 

• Focus on profit by segment. This type of focus can engage your segment leaders. Please encourage them to compete healthily and build the understanding of profit by segment into their KPI’s. When you segment your business by product or service lines to find out which areas of your business have the best revenue and net income – you begin to use your data for decision making. Healthy companies rarely keep divisions because they’ve always had them. If salaries make up a big part of overhead, you can allocate them based on how much time they spend on each segment.

There’s no doubt that building metrics and, or KPI’s based on driving profitability benefits everyone in an organization. However, starting or finding time for these problematic leadership conversations can be a monumental task. Having an outside professional drive the discussions can take off the internal pressure. 

Ready to start the conversations? Get in touch today at doug.hershey@thoughtiq.com​.

---