Is your company producing bad profits?

To grow profitability, a company needs 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 a company wants to create a value-driven, profitable organization, where does it start?

By Janet Boulter

Bad profits are derived when a company cuts its profits to increase its customer base (but is not sustainable), customizes its products for a specific customer group (cannot sustain that level of customization), cuts quality, focuses its business model on the short-term, all of its revenue comes from a few customers (all of its eggs in one basket concept) or it takes on work or customers that are not compatible with the company’s expertise and capabilities. All of these are examples of “bad profits.”  They are considered bad or undesirable because they do not contribute to growing and sustaining a company’s profitability for the long term and they are not value-adding business strategies.

The best place to start to reassess a company’s growth strategy is to review its mission and vision for the organization. Why was the company founded? What are the main products/services offered? Has your marketplace changed? Has the company’s customer base grown, changed, or shrunk?  Has the company culture allowed it to attract and retain the best talent? A company needs to realign its business strategy, goals and objectives with the mission and vision of the company.

Preparing for growth

Are the 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?  Does the company have the capital and resources needed for the planned growth?  Is the company’s growth plan compatible with the company’s core values? 

Once the company’s strategies are aligned with the corporate structure the company then needs to make sure its 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 the company’s attrition rate? Buying patterns will vary considerably depending on the company’s business products/services; however, conducting this analysis yearly will help keep the strategy in focus.

After a company has profiled its customers, the next step is to conduct a customer profitability analysis. The analysis needs to be customized to the organization but generally it should include four to six criteria to rank each customer. This process will give the company a final score it can use to measure profitability. Some examples 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 the company’s products/services?

These are a few examples of key metrics that a company can use to determine the profitability of its current customer base. This information compiled with the customer profile will help a company to decide if it can move these customers to profitability or if the company needs to let them go. For most businesses, letting go of any customer is a challenge.

After the company has completed its analysis, it will then need to review its growth and marketing strategies and make sure the programs are meeting its customers’ needs.

Internal functions

Next, it’s time to focus on the company’s 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 a company has to replace an employee with more than five years of experience the amount can be even higher. Reviewing employee empowerment programs and making adjustments accordingly can have huge impacts on the bottom line.  Part of the company’s growth strategy should focus on the employee’s skills and capabilities. At least once a year, complete an employee skills matrix. This matrix will help the company assess where its current talents excel and where it needs to add or change skills. 

Making sure the company has the proper skills and abilities in your workforce, and reducing turnover through improving empowerment programs will have a significant impact on its 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 a company aligns its goals and strategies with its vision and mission it will ensure that the organization has the resources needed to outpace the competition, exceed customer expectations, and grow profitably. 

Janet Boulter (jboulter@centerconsultgroup.com) is with Center Consulting Group which specializes in working with businesses and organizations focused on improving their business practices.

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