Do you pay the appropriate attention to both revenue and net profit (even if you’re a non-profit)? I had an interesting discussion with a leader about the use of financial measures as directional tools to focus his employees’ efforts.
He finds that his people can relate to company financial goals more easily than other goals, so he used the measures to give his staff indicators of success or lack thereof. He personally doesn’t care that much about the ultimate profit and is more interested in employee development and engagement but he uses the numbers to align the organization’s efforts.
He also uses net profitability specifically as a measure of allocation of resources. He follows an old Drucker theory. In an article in the Wall Street Journal in 1993 Drucker called out five deadly sins of businesses. One sin was feeding problems and starving opportunities
This leader believes in feeding opportunities and starving problems. He pays very close attention to those 20% of his products and services and employees that make him the most money or have the potential to drive success (remember the Pareto Principle?). He spends his time and energy trying to build on their success rather than revive the losers.
He also spends time looking at the subtle contributors to profit, both positive and negative. A small slip in margin can have a devastating impact on profit. Likewise, he knows his organization will reap big rewards by paying more attention to their best customers. Loyal customers are six times more likely to rebuff competitive offers, especially on price, and they are six times more likely to recommend you to a friend.
I remember years ago in my early days of owning a real estate and building company when I equated being busy and having cash to being successful and profitable. I didn’t do what this leader does on a daily and weekly basis
He makes sure to have the right information readily accessible – a focused financial tool designed for this purpose. Too often, I watch leaders delving into massive spreadsheets or lengthy P&L statements to mine the data for profit indicators. Too much information is getting in their way, and it’s often no longer current. This leader makes nimble decisions because he has easy access to up-to-date information in a headline format.
Even non-profit leaders need to pay attention to revenue and find some substitute for net-profit as a measure of success. I like to remind those non-profit leaders who shy away from talking about money that with “no money, no mission.” It’s that simple. You can’t serve your mission if you don’t have money.
How will you use profit measures this week?