Plummeting Profits

Plane on fire WEBAsiana Airlines’ Flight 214 was headed in the right direction and aiming for the correct target, runway 28L at San Francisco’s International Airport. According to the online San Francisco Chronicle, unfortunately, the Boeing 777 was “behind the power curve” as described by Jim Tilmon, a former commercial pilot and aviation consultant in Arizona. Approaching the runway should be undertaken with a certain level of power, states Barry Schiff, a former pilot for TWA who writes about aviation safety. Business profits too, must be approached from a certain power standpoint.

Organizations with inadequate profits are falling behind their growth curve and have failed to use a power approach in addressing profits. Simply driving a lot of revenue into a business does not guarantee success. Many business owners think that focusing on top line revenue is a plan for growth. However, without a solid understanding of how much money it takes to keep the doors open, and how much money it takes to produce the product or service, a company is on track for a collision with failure.

Profits are necessary for growth. Therefore, it’s critical that there is a specific and well thought out strategy for driving profits into a company. Successful companies recognize the importance of creating a flight or profit plan (budget). This plan should be a 12-month view of the company’s core competencies from which they derive revenue, monthly projections of revenues, cost of goods and expenses.

Without such a plan, the CEO doesn’t realize how high, low, fast, or slow his or her company is traveling until the company hits a 14,000-foot mountain that causes his or her business to crash and burn. Some entrepreneurs think that they simply need to spend less money than they bring in. Growing and keeping profits is a bit more complicated than this simple formula. While many entrepreneurs recognize they need a business plan, most are not aware of the fundamental profit design of their company.

For example, leaders need to be aware of the methodologies for distributing information. The way information is distributed, can either improve or lower profitability. Tracking profits is based on a complex, interdependent set of components that contribute to the company’s financial performance. Several other rarely monitored factors can affect a company’s profit design. Let’s examine a few of these elements.

Scope: Does the company have a wide scope: A wide range of applications for its products. A narrow scope: Are the company’s products more specialized? A vertical scope: A more specific product. A horizontal scope: Does the company produce a product that specializes in diverse applications?

Strategic Control: What is the magnetic element that is keeping customers coming back on a regular basis? Can the CEO define it? Can your employees define it? Even more importantly, how about the sales team?

Knowledge Management: As referenced above, it is critical for leaders to understand the manner in which the company leverages its unique knowledge. Is information accessible? Are efficient systems in place to capture processes that ensure efficiency?

Capital Intensity: Does the CEO look ahead and plan for new opportunities that may require additional funds? Are these included in budgets?

To help ensure success, conducting the following activities will help overcome the challenge of profit pitfalls.

  1. Identifying the company’s revenue groups
  2. Ensuring better pricing options
  3. Challenging all assumptions about how the company makes and keeps money.
  4. Helping employees understand how their jobs affect the bottom line.

Focusing on a company’s profit design will go a long way toward helping a CEO fly ahead of storms, turbulence and other challenges outside of his or her control. A good example is the recent recession. Designing a good flight plan with the right components ensures stability even when the economy is not. Without a good profit design, a company will indeed lose power, crash and burn.

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