Are your customers looking after your profits? As I say in my ebook Simply Manage:
If you look after your people, your people will look after your customers. If you look after your customers, they will look after your profits and pay your wages.
Profit is the outcome of all the activity in a business. In public or in not-for-profit organisations the aim usually is for neither surplus or deficit. The financial results of any type organisation are shown as an outcome in the bottom right hand corner of the 2F diagram. This emphasises that the financial results are dependent on everything else. Just chasing profit, for example, is usually fatal for businesses in the long run, especially those that then take all of that profit out of the business.
Of course there is this idea that businesses solely exist to maximize their profits. This leaves out their purpose, which is whatever they supply that is of benefit to customers and who then are willing to pay for. Ideally your business creates greater felt value for customers than what they actually pay. Interestingly writer Peter Drucker stated that business purpose was actually ‘to create a customer’. In practice you should say what it is your business does to create that customer. Have you written down what is that you do for customers?
The benefit or value that customers feel they get from what you provide is crucial in how much profit can be made. Your offering must have quality (doing what you say it will do); in addition, it or the way in which you provide it, should give that extra something that enables you to stand out in their minds.
I have mentioned Steve Jobs before and I don’t mean to go on. However, I recently came across a blog on profit by Frank S. Robinson that made an interesting reference to Jobs. As Robinson says, Jobs made loads of money, but that wasn’t his main aim. He appeared to be driven to perfect products that were useful to customers. This inner drive was allied to his obsession with simplicity. The profits that Apple did make enabled him to go on innovating. He didn’t stop.
Consider also the recent discussion about our low productivity in the UK. Businesses, especially big businesses, in this country don’t invest enough in equipment, in training, or in research and development. They do not even make cost neutral activity like routine continual improvement of working methods part of everyone’s everyday job, the results of which ensure continued profitability.
The lesson for the rest of us is that profits should not just be viewed to be taken out of the business. A certain retailer recently in the news springs to mind. Look what sadly happened to that retail chain when too much money was taken out of the business.
No. Sufficient profit needs to be made and retained so that a proportion can be reinvested in the business to ensure its ongoing improvement, development and hopefully to innovate.
Failure to reinvest and continually improve originates at the top. Owners or board level executives can isolate themselves from the day to day issues that affect productivity and hence competitiveness and profitability. This leads to decisions being made in isolation that do not take into account the reality of how value is being added for customers. It should not be surprising that management by walking about and taking a genuine interest in what happens in the workplace can be very powerful. You don’t need consultants to run ‘engagement programmes’ if you, as a manager, show an interest.
In conclusion, business profits are an outcome that is necessary for a return on the capital employed. However, it is essential for some retained profit to be reinvested in equipment, in training and in research and development for the enterprise to survive and thrive over the long term.
Is your offering sufficiently attractive to customers to generate the profits to reinvest for the future of your business? What profit allocation do you make for reinvestment in your business? How regularly does a top manager spend time in your value-adding workplace? And if you would like my help do drop an email to me at firstname.lastname@example.org
In the next blog, as we move round the 2F diagram, we are going to start looking at making improvement part of the way you do business. To quote one of my own taglines, learning is the key to improvement.