January 2008

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following article was first published in the Eastern Daily Press' 'The Business'  on 23 January 2008</I></div> <bR> <div> <B>Profitability is everyone's job</B></div> <bR> <div> I periodically run a management development course that teaches corporate managers some fundamentals of finance and a simple process of bringing changes to their organisations that deliver bottom line benefits.  Many of the managers who attend these programmes have operational or administrative roles and think that there is little they can do to affect the company's profitability, unlike, as they perceive it, their sales and marketing colleagues.  However, it is often operational employees on production lines or involved in distribution and warehousing who see most clearly where a manufacturing business is creating waste or is operating inefficiently.  And office-based staff in financial or service sector businesses frequently know from day-to-day experience that certain tasks they are expected to perform are either unnecessary or are repeated by others due simply to ineffective processes.  </div> <bR> <div> Taking a simple definition of profit to be sales revenue minus costs, there is, I contend, nobody in any business that can't have some effect on the bottom line.  Identifying wasteful practices and changing them will reduce costs.  Being more aware of things like turning off lights and computers overnight can help to trim overheads (and show greater regard for the environment in the bargain).  Putting effort into purchasing goods and services more effectively is usually rewarded with lower costs and, therefore, greater profit.  </div> <bR> <div> But profit itself should not be used as an isolated measure of business success.  It's a sobering fact that most businesses that go into receivership are making a profit at the time.  Their problems usually stem from the fact that they have simply run out of cash.  So another concept this course introduces the participants to is return on investment - a way of looking at the numbers that puts profit into perspective.  </div> <bR> <div> Return on investment is regarded by many experienced observers as the prime measure of success in any business.  There are a number of ways this measure can be expressed, but a common one is return on assets - calculated as a percentage of profit earned divided by the value of the assets of the business.  These assets will include things like plant and equipment, vehicles, land and property as well as inventory, materials, cash and debtors (people who owe money to the business).  In our private lives, increasing our personal assets - a new car or an extension to the house - is generally seen to be a good thing, a symbol of accomplishment.  So, in our business roles, it may come as a shock to learn that one of the main aims of any business should be to reduce assets to the minimum necessary to supply the quality of product or service required by the customer.  </div> <bR> <div> When costs are reduced, or a process is improved, it is often the case that there is a corresponding reduction in the use of assets.  Similarly, a reduction in assets - an unnecessary delivery van, for example, would also reduce the cost of maintenance and fuel, thus reducing operating costs.  Either way, the returns those assets generate would increase.  </div> <bR> <div> Everyone in your business will have ideas of ways in which processes can improve.  Seek out those ideas and your profitability and return on assets will improve as well.  Next month, we'll look at how everyone you employ has a role in increasing the other part of the equation - your sales revenue.</div> <bR> </td> <td valign="top" width=180 BGCOLOR="#CC3333" TEXT="#080000"> <bR> </td> </tr></table></body>