Many incidences
we have faced in our strategy workshops, where we have to explain the
difference between profit and profitability. Yogesh Jain of Niche Quality
Systems Pvt Ltd, who is partnering for the DNA development service in Indore
region has witnessed most of the confrontations related to profitability.
The question,
what is the aim of doing business? Elicits an immediate and instinctive answer…
‘to make profits’ from most of our workshop participants. Anything other than profit seems to be unthinkable
for both business owners and managers. This
is the point where we struggle most to make the key players of the business
think beyond profit. One aspect that we
push them to go beyond profit is ‘profitability’.
When we say that
‘profitability is healthier measure of business than profit’ is not welcome by
most of the business owners, partially because they do not understand the
difference between these two and due to the sentimental attachment they have
towards the term ‘profit’.
Why this
strong sentiment? We feel …….because everyone
in the company pays attention to profits. Most of the key business teams have a
revenue / budget / profit plan, each department / functional head owns an important
element of that plan and progress is watched closely by them in the review
meetings. All managers work strenuously to
meet these targets. Yet, even if each manager meets the budget targets, the company
seems to be a lot less profitable.
I remember
sitting in a review meeting of a distribution company several years ago. The
business owner of the company sat at the head of the table and looked at the four
to five managers sitting on both sides of the table. Each manager, in turns
began..’ here are my numbers’……. After presentation, they had discussions on
implications of the numbers presented and finally all adjusted their numbers
and a consensus was reached. This was the half yearly plan.
In the
following quarter the Sales manager grew the top line and met his quota. An
additional sale came from new customers who ordered frequently in small
amounts. The gross margin on these orders did not cover the distribution cost.
Other customer ordered products that were out of stock locally and had to be couriered
from other regions.
Two things
were noticed in this situation. First both the Sales manager and the Logistic manager
were on target; the sales manager grew revenues and the Logistics manager met
his target because his budget was based on an average cost that allowed these
inefficiencies with a hope on future business. Even though these managers met
their numbers they failed in managing the profitability.
Second, these
uncommon sales and orders could have been made much more profitable through
some very simple business oriented twists, which would have benefited the
customers as well as the company. These twists require only a business acumen
and execution - not extra financial capital. Our strategy workshop highlights
this point to a large extent.
As a
discipline, we need to see Profit and Money as two different things. It is
certainly possible for a firm to make a huge profit and have no money. It is equally
possible that company is flush with funds but is suffering from losses. What happens when an organization shows a
profit? There will be a line of people
standing in a queue waiting for a share of profit. Some organizations get into trouble because
they don’t make profit. And others get into trouble because they make profit.
But successful
businesses stand on two pillars. One: the ability to generate profit. Two: the
ability to manage cash flow. Managing cash flow is very much related
profitability. But this is missing in most of the companies… profitability is
unseen and unmanaged!
