By Anne Graham, AME Author, author- Profit In Plain Sight, AME Director Canada -British Columbia. www.annecgraham.com
When I was starting out in business as a P&L manager for a Fortune 50 company, a wise mentor gave me advice that’s worth repeating. It was “there are only three good times to focus on profitability – when you’re growing, when you’re plateaued, and when you crater”. Duh. The best wisdom is often painfully obvious, isn’t it? But are you using it?
Why a focus on profit is required even when you’re growing
It's easy to be carried along on a wave of growing revenues which can cover a multitude of sins! But there’s only one little problem. When I’ve researched the results of various “Top 100” and “Top 500” lists, here’s what I’ve found. In any given year, a whopping 40 percent of the companies who GROW revenues will actually SHRINK their profits! Why? Because growth is often accompanied by planned and inadvertent spend, spend, spend.
- Revenue always comes at a cost.
- Perhaps you needed to invest in a big new sales or marketing campaign to get those revenues in a booming market where you had to stand out from the competition
- Perhaps you’re in a shrinking, highly competitive market and you need to apply heavy discounts and cut margins to the bone to get new business or keep existing business.
- “Buffet Plate Syndrome” leads to increased investing and spend
Have you ever been handed a large plate at a buffet… and proceeded to completely fill it? In good times, we get handed a buffet plate called “reinvesting in our business” and proceed to fill it with expenditures that may have been put on hold in the last downturn. Before we know it, we’re having a GREAT year on the top line… and nothing to show for it on the bottom line.
- Efficiency suffers when the rivets are popping off
I work with leaders all the time who are exhorting their shop floor to keep up with orders at all costs. Lean often goes by the wayside as the scramble begins, with a focus on speed over quality (leading to lots of orange on the DMS boards, and frantic and costly attempts to rework and still meet on time delivery targets). Hiring happens in an attempt to keep up but training often lags, exacerbating the speed-quality conundrum. And before you know it, costs are out of control, and profits are down.
Give yourself a smaller buffet plate for expenses by taking profit off the table first.
Why a focus on profit is essential when you plateau
Profit typically vanishes as sales start to fall off and storm clouds gather, because you’re too expense-heavy. We’ve all been taught to tighten our belts – which is EXACTLY what can push you into the crater. Here’s why:
- Tightening your belt doesn’t make you less hungry. Instead you fast and binge on expenses (often quick-fix related), cut minor items that are too small to make a difference on the bottom line, or cut costs that are actually investments to help you catch the next upswing. That’s like not eating and hoping you don’t lose muscle mass – it can’t happen.
- It’s easier to renew momentum when you’re still on the plateau and haven’t yet experienced the trajectory shift into decline. When you continue to take profit off the table first, even when you’re plateaued, you will be able to cut the fat in your business – without impacting muscle. AND, you’ll have the resources to catch your breath, weather the storm, and invest strategically to create the next uptick.
Refuse to tighten your belt using conventional thinking. Instead, remove the junk food from your buffet plate – NOW.
Why a focus on profit is crucial when you crater
At this point you’re battening the hatches, doing everything you can to ride out the storm. You’re laying off good people – losing the muscle you’ll need for growth. You’re chasing bad business, hoping more revenue will help you buy your way out of trouble (it won’t). You’re putting everything on hold with the seven most limiting words to business growth: “we don’t have the budget for that”. You’re late-paying creditors, damaging the very relationships that you’ll need in the future. You’re in full-on crisis management, and unless you’re on salary, owner's pay is likely one of the casualties. You need the discipline to put your own oxygen mask on first, and KEEP taking profit and owners’ pay off the table, which is going to seem impossible. Here’s why
- It’s the discipline of continuing to make profit a priority that will drive the creativity to get things back on track. Otherwise you’re like the little Dutch Boy with his finger in the dyke. You’ve focused on putting everything in your business, knowing that the end-game is inevitable.
- Pruning a plant is a tricky thing. If you prune the right areas, even the most spindly plant will renew itself. If you prune the wrong areas, you’ll kill it. Be prepared to prune REVENUES to only those that are profitable, rather than forcing bad growth.
Keep creatively pruning expenses, NOT profit and pay, and you’ll find yourself with a lot more green.
The typical P&L structured according to GAAP (General Accepted Accounting Principles) is the problem. You track sales, then expenses, and profits come last as a rather unappealing leftover. I’m not suggesting you abandon GAAP, as its required for reporting purposes.
But from a managerial and internal-reporting perspective, turn your P&L upside down. Track sales. Subtract profits. And fill the much smaller plate that’s left with as many expenses as you want to, from the full buffet available so you’ll never feel deprived. It simply requires a massive-but-in-an-instant mindset change plus the discipline to use a set of rigorous practices to do it,
This one simple strategy will get you out of having a business that merely survives… and help you create one that thrives.
What action will YOU take next, based on where you’re at today?