Gross Revenue is One Thing but NET Profit is Another

Gross Revenue is One Thing but NET Profit is Another

By Keith Scott, MBA

Let’s face it, when gross revenues decline, and financial projections deem themselves as overzealous, organizations begin to cut staff or “right-size”, but is this the right strategy to take? Instead of making across the board cuts, it is time for organizations to evaluate their people, their process, and their technology.  In my 20+ years of advising clients, I have observed companies focused only on top line revenue growth without regard to operating costs.  The mantra is always sales, sales, and more sales.  The U.S. economy has been on the rise since 2010, but what happens however when there is an economic slowdown?  Is it possible to maintain profitability?  Absolutely!  When organizations focus on their business processes, the process of bringing products and services to the market place is implemented with minimal waste and optimum performance.  “Waste” is any activity whether human or technical that occupies resources and yet creates minimal value[1].  Examples of such waste are excessive inventories, process steps that are not needed, inefficient distribution channels, inactive or underutilized employees, outdated technology, and products or services that do not meet customer standards of quality.  The organizations that “think lean” in troubled times can adjust from a revenue shortage by addressing their utilization of people, process, and technology.  “Thinking Lean” will allow organizations to maintain their net profit margin by focusing on the cost side of doing business.

Reducing costs is not easy.  By implementing a broad cost-cutting approach, you may cause more harm when the economy recovers.  For example, announcing massive layoffs will cause panic in your organization and will cause your best workers to leave because talent has choices even in a down economy.  Who will drive your organization forward in the future when these individuals are gone?  It is estimated that the intangible value of intellectual capital takes 18 months to replace and losing those individuals that know your business the best could put you behind the competition.  Instead, leverage your best workers and/or an unbiased outside resource to evaluate areas for process improvements.  “Lean” organizations find ways of automating their business processes with minimal use of employees to service them.  It is imperative however that you are forward thinking in such an approach.  In short, thinking lean means finding a better way to do more and more with less and less.  This means less time, less equipment, less space, and less human effort while maintaining quality.

What should be your strategy for the future?

People

  • Invest in training to increase the knowledgebase of your staff
  • Invest in communications management for knowledge sharing
  • Invest in strategic planning to be a proactive organization rather than reactive

Process

  • Invest in process automation to reduce human dependency
  • Evaluate process workflows to determine areas of deprecation and duplicity
  • Invest in process reengineering to make current processes more efficient
  • Integrate suppliers into your business to reduce inventory levels
  • Establish benchmarks for your processes and monitor their performance

Technology

  • Upgrade existing technology to ensure the speed at which products or services are delivered to the customer
  • Invest in analytic technologies and reporting tools to evaluate process performance
  • Invest in BPM technologies to automate workflow

It is always wise to prepare for war in a time of peace.  With a strong economy, effective business leaders proactively prepare for the inevitable downturn.  Doing things more efficiently is the better strategy for organizations to survive the cyclicality of business.

[1] “Lean Thinking: Banish Waste and Create Wealth in Your Corporation”.  James P. Womack and Daniel T. Jones.

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