By Dr John Hendrikse
Profit is not a swear word:
It is the first source of finance of a business and it is the business’ internal bank. For a profit making entity (e.g. Profit Company) it is the bottom line of performance. Even if the entity is a non-profit making (e.g. NGO/NPO/NPCs and SOEs) the entity needs a surplus bottom line to fund CAPEX requirements. Furthermore, profit is the value driver to protect value and grow company and shareholder value.
“If you can’t measure it, you can’t manage it”
Profit is the ultimate measurement of the success of a business i.e. profit after tax and it is measured in relation to 4 areas:
- Growth of absolute profits
Growth of gross profits, operating profits and net profits (net profit after tax).
Growth as measured in terms of year on year, month on month and actual versus budget.
- Growth of Margin
The business growth is to preserve the margin and grow the margin. The margin is the contribution to funding overheads and profits.
For example: Apple Computers has a GP% of ± 60%. That is the principal value driver.
Whitey Basson, the retired CEO has one value driver for Shoprite – margin, margin, margin.
- Return on Profits (NPAT)
The effectiveness of the business is not only absolute profits, but measured in terms of return on assets managed, return on investment and return on equity.
- Return on Equity versus Cost of Equity
The cost of equity is the cost of risk and every business needs to know its cost of equity.
If the return on equity is greater than the cost of equity, the business is making positive economic goodwill. If the return on equity is less than the cost of equity, the business is making negative economic goodwill.
So profits are critical to the survival, success and value creation of any business – SMEs, listed companies and multi-nationals.
SIX WAYS TO DOUBLE THE PROFITS
Financial Statements are equations.
For example the Balance Sheet Equation is:
Equity = Assets less liabilities
The Income Statement Equation:
Profits = Revenue less Expenses
The Cash Flow Statement Equation:
Bank Balance Improvement = Cash Inflow less Cash Outflow
So to double the profits one needs to strategise the elements that make up the equations.
If the existing business model in relation to the Income Statement Equation is as follows:
EXISTING BUSINESS PERFORMANCE
DOUBLE THE PROFITS STRATEGY
- Sales Units Improvement
Improved personal selling +5% 1 000 + 5% (+ 50 units).
- Sales Mix Improvement
Product Mix ABC in terms of Contribution Analysis.
- Improved Sales Pricing
As result of positive market research, and a price sensitivity exercise + 5% R10 + 5% (50c).
- Reduced Cost of Sales
Improved buying and negotiations + 5% R5 less 5% (25c).
- Overheads Reduction
Improved negotiation on all overheads
Treat all overheads as controllable expenses less 5%.
- Improved Efficiency
Reduced wastage and improved productivity.
NEW BUSINESS PERFORMANCE OPERATING BUDGET
Achievement: Double the Profits!
Now the hardwork is to set in motion the Strategic Plan and the Implementation Operational Plan to make it happen!
For a Practical and Dynamic Workshop on the Strategic Plan for your business contact Dr John W Hendrikse at 021 782 0765 / 082 820 5338
John is a BAN alliance partner and CEO of OnlineMOI, OnlineBizValuations and ProfitPoint Solutions that provide value-added online solutions to support accountants, attorneys, auditors, company secretaries and business professionals