Every business owner has experienced the reality that anticipated profits fall short of financial projection – a realization that can have serious implications. Often the initial reaction is to slash expenditures in an attempt to restore profitability. This short-term strategy works well to help get many organizations through a rough patch. However, successful organizations look at the long-term advantages of solutions that will help their company grow without the need to crunch more numbers. Here are my top three:
1. Transparency. If employees work in a vacuum (i.e. the company does not practice open book management), they cannot see the financial “big picture.” As a result, decisions made by leaders may seem ill-advised or unfair. Financial transparency and communication around operational decisions connects employees to the why – and that understanding propels them to act strategically and to stay mindful of the forces affecting the bottom line. If your organization has not developed a culture of transparency, adding to the bottom line is a good reason to embrace it.
2. Involvement. When leaders demonstrate that they want everyone in the organization involved in meeting its goals, most employees will step forward energetically in creative and productive ways. Solutions to profitability challenges may emerge from unexpected teammates, so don’t count people out because they’re not in the C-Suite. A well-developed and engaged culture involves everyone impacted by the decision. This is fundamental to developing teamwork, cooperation, involvement, and trust, between people, divisions, and levels. These elements allows everyone to feel invested in the greater good of the organization, enabling employees to become engaged and to understand better their value to the organization. Higher productivity results as employees begin to take ownership of their individual contributions to the bottom line.
3. Spend Money. It may seem like the wrong approach, but you may recall the old saying, “You have to spend money, to make money.” And while this may be true, it’s actually much more complicated than that. It’s not just about spending money. It’s about understanding when and where to spend money to boost your profits. When it comes to making a profit for your business, it’s not so much about mindful spending, but about strategic spending. Too often I have seen companies limit or freeze a strategy because leadership becomes concerned that money is tight and wants to err on the side of caution. However, sometimes you have to make an investment in your business and go for it.
For example, in Jim Collins’ book, “Good to Great”, his study indicated that the companies that took the time to discuss, debate, and agree on one key driver for their financial maneuvers, were the ones that went from good to great. The question Collins’ proposes to help business leaders come up with this strategic metric is “If you could pick one and only one ratio – profit per x (or, in the social sector, cash flow per x) – to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine?” (p. 104). For instance, assume you operated an advertising agency and were greatly impacted by increased competition in your area. You decided to lower your hourly rates in order to be more competitive and at the same time you increased your service offering to provide value added services to your clients. In this case, you might determine that profit per client would be a good x measurement for your business instead of the traditional measure of profit per hour billed. How strategic are you with your business spending? Where do you scrimp and where do you spend? And do you need to rethink “strategically” about what you are truly investing in.
What do you think? What else can organizations do to reduce cost cutting tactics and invest in profit building strategies? I hope these best practices will motivate you to do even more to enhance your company’s bottom line.
About: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.