Profit: It’s how you know your business works

by Kate on January 26, 2010

Profit Jigsaw

What's yours?

Profit isn’t everything, but it’s how we know our business works. Yet it can be so much easier to talk about the stuff we do (or mean to do) than about results.

And as time goes by you mark off items on your to do list, but it’s not completely satisfying because you’re not getting there.

Lack of attention to the numbers means businesses that could be thriving end up barely surviving and some fail when they need not do so. Even successful businesses can suffer when leaders cause themselves unwarranted stress just because they don’t feel in control.

That’s not what business owners and leaders intend – so how does it happen?

Here are two possible reasons:

Fudged Financials

It’s a problem when we tolerate fudging of goals: that vague commitment to profit and understanding nods when we don’t quite make it. ¬†Sometimes it seems we don’t even like to admit we have a goal to make a profit in business.

But when you’re leading a business you’re accountable for results not just activity. The starting point is to be truthful about how much you need to make and how much you are making. That way, activity can be directed at results and if it’s not working you’ll know and can do something about it.

Talking about the past

Meetings – especially ones that feature financial information – often end up being largely about the past. Something like this:

  • Explain why things turned out the way they did.
  • Make a list of things that did or didn’t get done and critique the month (or year).
  • Reinforce the big vision for the future. Convince ourselves it’s still do-able.
  • Agree to fix things that didn’t work. Talk about what new things might be worth a try.

Energy often leaves the room at the first dot point, enthusiasm at the second … and nothing much changes. Not good use of time.

We forget that numbers are just numbers and we can’t change the past. We also forget that nothing good really comes from beating ourselves or others up about how things turned out.

The results are the results. What matters is what we do now.

Here are three steps to a more productive way to talk about profit, so you can be sure you have it.

1. Commit to a profit goal

Really commit. To a goal you will work to achieve. Not just this month but for the whole year.

How much is enough? Well that is your choice. Certainly your business needs to make more than you need to live on and pay back your loans — at least if you plan on growing, innovating and to getting a reward for the risk you’ve taken.

A lot of businesses set a goal for Operating Profit (making sure it can cover loan payments, dividends and funds for reinvestment). Once that’s sorted, Sales and Gross Profit Margin are other figures it’s handy to have targets for. Break the goals down to monthly targets.

Obviously the right goals will depend on your situation so get advice from your accountant on this – especially if numbers aren’t your thing. And if you feel the urge to get into this in more detail, take a look at¬†Westpac’s financial education programs.

2. Get accounts. Every month.

Because you need to know where you are (tell the truth) and it’s good to be able to see results.

But I understand that if you’re not using your accounts you might not feel a burning need to have them. We’ll get to that next at the next point.

So, if you don’t have accounts that show the true results of the business, do what’s necessary to get this happening. Call your accountant or bookkeepet to get it rolling. Today.

(Getting monthly accounts is like flossing. It might be hard to see the immediate benefit, but it pays off in the long run.)

3. Have a monthly wayfinding meeting

Once a month re-orientate towards the goals. Look at the big picture rather than using this time to check off task lists, or as a post-mortem on the financial results. Here’s a format you could use:

  • Use the accounts to check where you are relative to the goals.
  • Based on where you are now, where will you be in 30 days? Is that where you need to be and if not, what’s the target?
  • What’s ahead? In order to reach the target, are adjustments needed to what’s being done now?

At first it might be hard to hit the targets, but stay focused on the goal and doing what works, and results will come as you get better at reading the landscape and making adjustments.

The risk is that you’ll give up on the goal when you encounter reality. But you’re here, and you’re not the giving up type, right?

Enjoy the journey,

Kate

Join the conversation

  • What things do you set goals for?
  • What do you do to keep your business on track?

{ 4 comments… read them below or add one }

1 Kate Groom January 27, 2010 at 6:32 am

Welcome Brian.
Thanks for sharing what you pay attention to. You’ve clearly highlighted some key areas for business owners to focus on — and you do a terrific job of this yourself. Great point, also, on the danger with purely sales oriented goals, which can drive people to be busy yet ultimately frustrated when they don’t see the returns (or with returns but worn out).
Thanks for diving in here :-)

2 Brian Sisco January 26, 2010 at 10:58 pm

Hi Kate…good post given the time of year. I’ve always set goals on Operating Profit and adjust discretionary spending quarterly using a breakeven analysis. For example, a bad quarter will mean less capital reinvestment for the following quarter while a a strong quarter can mean increased debt reduction or transfer of dividends for retirement purposes. We have found that sales or revenue centric goals can lead to lower profit as we do “whatever we can to get the sale” which translates into lowering our prices. This year we are looking at lead generation, conversion and attrition rates to get an ROI on our marketing spend.

3 Kate Groom January 26, 2010 at 3:20 pm

Thanks for sharing this, Gini. And those are great guidelines for reporting. Nice job by your CFO!

You got me thinking about the benefits of having to do a monthly report. Common where there’s a board to account to (or Vistage/TEC) but not part of many micro/small biz structures. I’ve done such reports in corporate life and as part of TEC and it sure helps to get perspective and approach issues more thoughtfully and productively when we get to face-to-face meetings. Perhaps there’s something for franchise people to think about here? Heading off to ponder that…

Kate

4 Gini Dietrich January 26, 2010 at 10:02 am

Kate – I had a really good email from our CFO this past weekend. I’ll paste a portion of it below.

By now, you should have the following:

1. The finalized 2009 financial statements: income statement, balance sheet, and cash flow statement.
2. A brief summary discussing the 2009 results and variances from plan: sales missed or were higher because…., expenses were higher or lower because…, cash flow was higher or lower because…..
3. The final financial plan for 2010, including income statement, balance sheet and cash flow goals should be finalized, with supporting “how’s” – the strategies and actions being taken to achieve the financial goals. All your monthly reporting should compare the actual results with the plan, and discuss actions being taken to stay on track to meet or exceed the 2010 financial plan. This can be very simple-nothing fancy. But, be sure to set goals for your people that support your goals for the business.
4. Goals should have been assigned to your team members by now, which align with the organizational goals. Accountability is driven by if the goals are not achieved or exceeded a bonus is not forthcoming.

There is still time to accomplish these things if they’re not yet finished.

http://twitter.com/ginidietrich

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