The External World
June 1, 2009, 9:04 pm
Everything that exists outside of the organization.
So far in this series, topics have been on the profitability of companies, including the key formula: Revenue minus Expense = Net Profit.
The last set of blogs dealt with expenses used to generate profit. Several of the newspaper articles mentioned dealt with expenses that were being caused by actions of others outside the company, such as government agencies.
While profitability reporting is primarily from within a company, the drivers of the revenue and many of the expenses that create that profitability come from outside the company.
This “external world” is everything that is not within the legal boundaries of an organization. An organization includes all of its personnel (employees and contractors), its products and services, its physical locations and all of its rules, guidelines, processes and governance activities. A grey area exists with associates performing functions that have been outsourced.
The external world includes everything else that has an impact on the business of the company and its capacity to earn a profit. It includes the market, competitors, vendors, government, customers and any body of laws or regulations to which the activities of the business are subject.
And, let’s not forget Mother Nature and everything she is capable of: some of the most awesome phenomena. When these cause damage, they are called “Acts of God.” Which brings us to the final impacts from the external world: Acts of Men. These include follies of man like environmental damage, riots and war.
Finance is external?
The current economy, both the U.S. and others around the world, are suffering from the worst economic crisis since before WWII. For the U.S., these problems have impacted organizations in all sectors: commercial, academia, government, not-for-profits. Some impacts are economic supply and demand issues: such as the shift to putting goods up for sale at consignment shops instead of making charitable donations.
Others are from the financial markets. The collapse of the housing market has resulted in a huge increase in homes “under water” and foreclosures. In order to fight these challenges, there has been a concerted effort to keep interest rates low. This external event helps those who are “liability heavy” but not those who are “cash rich.”
Since one of the enablers of the current problems was over-abundant credit, lenders are more worried about defaults and credit is contracting. For many, due to nothing they did, companies and individuals of all sorts are suddenly seeing their credit limits reduced or finding new financing unobtainable.
Boils down to them and us, right?
On the surface, maybe; but no. The external world at times may look like the enemy. Indeed, some parts probably are enemies, either all or some of the time. The fact is, however, that without the external world, especially customers and vendors, you wouldn’t have a business. Nature and government being what they are, competition and regulation flood into any situation that is favorable and worthwhile. Including your business.
Parts of the external world are your friends and allies and these need to be carefully nurtured. Other parts can cause you harm and these need to be understood and contained. Everything about the external world is simply an integral part of making a profit. As such, it has a unique role in profitability reporting that is frequently overlooked and always difficult to incorporate.
Are you happy your revenues increased by 15%? During the same time your competitor’s soared 75%?
Subscribe to our blogs using either our 
