Profit Culture (February 2015)

Do you have a profit culture? Your first thought may be to wonder what I mean by that question. Let me explain.

Some companies are driven to achieve profit objectives. Everyone in the organization is aware (to a greater or lesser extent depending upon their role) of profit goals and acts in ways that support that objective. Delivery against revenue targets is paramount. Incremental spending decisions are viewed with a mindset which first considers where the company stands against its profit objective for a specific period. It is through this lens that the company considers its actions and plans for the coming months. When times are good, they may spend above budget if they feel the situation is warranted. If revenue falls below plan, then they will trim expenses accordingly and will not spend just because something is “in the budget”.

At the other end of the spectrum, are companies for whom profit is almost an afterthought. Spending decisions are made without regard to profit and sometimes individuals make decisions in isolation as opposed to consulting with peers or executive management. One can find people vested with spending authority but lacking the requisite awareness of the company profit situation and balance sheet position. They therefore can’t include these relevant factors in their decision making.

As they say, “a high tide covers a lot of rocks.” But even in good times, it’s important that spending decisions are considered relative to business plans and the current profit environment.   In good times, bad spending decisions may be hidden by strong revenues.   While they may not cause any apparent, immediate harm, they do have a cumulative effect which ultimately shows up as a reduced equity section on the balance sheet.

In tough times, however, the cumulative effect of poor spending decisions that occurred in good times can send the company ship crashing against the rocks. Even if management gets serious about spending decisions and develops a profit culture when times get tough, it may just be too late. Old habits are hard to change, especially quickly. And there is nothing one can do to reverse the effects of the past. They remain with the company forever as a depleted equity account.

So, what can you do about this?   Develop a mindset now that focuses on meeting profit objectives. Work with your CFO to review your balance sheet and set realistic targets for shoring up the equity section. Ensure that you have slack borrowing capacity and communicate regularly with your banker. Good banking relationships may be viewed as a “nice to have” when times are good, but they are critical when times get tough.

Do you have a profit culture? If not, start building one today.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]
The archive of these monthly newsletters is posted at the Resources section of homza.com

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