Is your Company producing Bad Profits?

by Janet Boulter

If something exists than we have come to learn - that the opposite of that thing must exist. So if you decide there is more to profitability than just increasing revenues (making money) you can then create a case for both good profits and bad profits.

In order to exist- a company must have positive cash flow. So, if your revenues are growing and your company's profitability is increasing then is there such a thing as bad profits? And if there is such a concept as bad profits should you be concerned?

Bad profits are derived when you cut your profits to increase your customer base (but is not sustainable), you customize your products for a specific customer group (cannot sustain that level of customization), you cut quality, your business model is focused on the short-term, all of your revenue is coming from a few customers (all of your eggs in one basket concept) or you take on work or customers that are not compatible with your company's expertise and capabilities. All of these are examples of what I call "bad profits." They are considered bad or undesirable because they do not contribute to growing and sustaining your company's profitability for the long term and they are not value-adding business strategies.

In order to grow profitability- you have to have a business model that provides opportunities to capitalize on short-term market conditions and customers while creating an organization that adds a valuable product/service for the long-term. So if you want to create a value-driven, profitable organization where to you start?

The best place to start to reassess your growth strategy is to review your mission and vision for the organization. Why was your company founded? What are the main products/services offered? Has your marketplace changed? Has your customer based grown, changed, or shrunk? Has your company culture allowed you to attract and retain the best talent? If you answered no to any of the above, then you need to realign your business strategy, your goals, and your objectives with the mission and vision for your organization.

Are your organization's short-term (1-3 years) and long-term goals (5-10 years) aligned with the mission and vision? Are those goals flexible enough to take advantage of changing market conditions while being audacious enough to allow for growth? Do you have the capital and resources needed for the planned growth? Is your growth plan compatible with the company's core values?

Once your have confirmed your company's strategies are aligned with the corporate structure you need to make sure your clients (customers) are profitable. The first place to start is to do an overall assessment of your customers. What is the gross revenue in sales per year? What is the average length of the relationship? What are the buying patterns? What is your attrition rate? What percentage of your customers provide what percentage of your sales? These buying patterns will vary considerably depending on your business products/services- but conducting this analysis yearly will help focus the strategy.

After you have profiled your customers, then conduct a customer profitability analysis. The analysis needs to be customized to your organization but generally you want to create 4-6 criteria and rank each customer based on that criteria, ending up with a final score you can measure profitability against. Some examples would include: do they pay on time? Do they require special customization or do they "buy off the shelf."? Are they relationship focused or are they the low-cost buyer? Do they have a potential to grow their revenue with your company or is this a one time sale? Can they benefit from several of your products/services? Do your employees enjoy working with them or are they too demanding? Do they tax the resources of your employees (call center support, tech support, etc.)?

These are a few examples of key metrics that you can use to determine if and how profitable your current customer base is. This information compiled with the customer profile will help you decide if you can move these customers to profitability or if you need to let them go. For most businesses letting go of any customer is a challenge but if these customers cannot become profitable to your organization, they must go.

After you have completed your analysis, review your growth and marketing strategies and make sure those programs are meeting your customer's needs. Are your strategies compatible with your customers' growth plans? Will these strategies help you stay competitive in the marketplace?

Now time to focus on your internal structure. Employee turnover has a huge negative impact on profitability. On average a company will spend three times the gross salary cost of each employee in the first year on interviewing, training, productivity, and benefits. If you have to replace an employee with more than 5 years of experience with your company the amount can be even higher. Reviewing your employee empowerment programs and making adjustments accordingly can have huge impacts on the bottom line. Part of your company's growth strategy should focus on your employee's skills and capabilities. At least once a year complete an employee skills matrix. This matrix will help you assess where your current talents excel and where you need to add or change skills.

Making sure your have the proper skills and abilities in your workforce, and reducing turnover through improving empowerment programs will have a significant impact on your long-term profitability.

There really isn't such a thing as bad profits, only short-term or narrow focused growth strategies which cannot support the long-term profitability and growth every company wants. When you align your organization's goals and strategies with your vision and mission you will ensure your organization has the resources needed to outpace the competition, exceed customer expectations, and grow profitably.

About Janet Boulter
Janet Boulter is an internationally recognized expert in business profitability. As a Business Advisor/Business Reconstructor with Center Consulting Group,a management firm specializing in providing integrated solutions for improved profitability, Janet works with clients in a variety of industries. For more information on consulting services, workshops or speaking engagements, please call (303) 368-9954 or e-mail: jboulter@centerconsultgroup.com

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