The BIG Question
June 4, 2009, 11:16 am
Over the past two months, we’ve covered the basics of profit and profitability.
We’ve touched on the concept of profit and how to calculate profitability. We’ve looked at the two components that drive net-profit: revenue and expense. Examples have been taken from the Contra Costa Times relating to current examples of each. And we touched on how individual businesses are part of a vast world that impacts commercial success, or not, every day throughout the year.
Now’s the time for the BIG QUESTION: how does all this high-level, definitional “stuff” relate to you? To paraphrase Rob Zazueta, the owner of TechKnowMe TM: “let’s cut to the chase.”
What is your business’ Net-Profit? More importantly, what is its trend? Is it going the way you want it to? Like the stock market, there are only three choices: up, sideways, down.
Everybody likes good news, so let’s say it’s going UP. Great! That’s fantastic given the current state of the economy.
What’s driving your higher net-profit? Is it increasing revenue? Decreasing expense? A combination of the two? What opportunities do you have to increase net-profit even more? What issues or problems do you need to work on to continue increasing your net-profit?
If your profitability is flat or declining, you need to answer the same questions, only they are more urgent. If revenue’s falling, which revenue streams and why? If expenses are increasing, which ones and why?
A quick way to approach these questions:
First step: what is your net-profit doing? Again, as in the stock market, what’s the trend?
Second step: what is driving the change in profitability? It may only be revenue, only expense, or a combination of both. Here are some examples of what may be happening:
|
|
UP |
UP |
UP |
UP |
Flat |
Flat |
Flat |
down |
down |
down |
| Revenue |
120 |
110 |
90 |
100 |
90 |
$100 |
110 |
90 |
100 |
110 |
| Expense |
60 |
50 |
30 |
40 |
40 |
$50 |
60 |
50 |
60 |
70 |
|
|
|
|
|
|
|
|
|
|
|
|
| Net Profit |
$60 |
$60 |
$60 |
$60 |
$50 |
$50 |
$50 |
$40 |
$40 |
$40 |
Which condition is the closest to what is going on with your business?
Third step: crisply and unemotionally identify why your revenue and expense are changing the way they are
Fourth step: for each cause, do something about it. You’ve heard it hundreds of times before:
- maximize your opportunities (i.e., do more of those things that are increasing revenue, decreasing costs and increasing net-profit)
- minimize your problems (i.e., stop doing those things that hurt revenue, balloon costs and destroy profitability)
As Herman Finer said, “To choose, it is first necessary to know.” (from “The Quotationary, p. 190).
So, “Where’s your Net-Profit?”TM
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 18
© 2009 Integrated Profitability TM
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