I trained as an accountant in the early 90s, and have trained many, many accountants since. With every year of experience gained, as a trainee, then as a finance director, then as an operations director, I had a dawning realisation of the most remarkable thing. Despite the best of accountancy training, I qualified with the most fundamental gap in my knowledge as an accountant. In hours and hours of lectures, coursework and exams, no-one had ever told me how to increase profit.
Without doubt there were classes that touched on improving profit – there was effective tax planning, ethereal debates on sharp accounting practice and calculator burning cost recovery calculations, but no-one ever taught us the nitty-gritty. No-one ever shared the knowledge that marks out the super finance director from the chief accountant.
The responsibility therefore falls to gnarly commercial finance directors and financial controllers, who have laboured at the coal face squeezing profit from a business, to pass on the lessons to the next generation. The lesson that was passed down to me, although over 25 years ago, is as clear today as it was then.
My finance director leaned back on his giant leather chair. He looked me straight in the eye as he had done a hundred shiny-suited, hyper-confident, newbie accountants before me and, with a huge sigh began, “Dougie, the thing that you need to understand, is that there are only FIVE ways to make profit…………”
What followed was so simple, some might even call it patronising, but changed my outlook on business. As a strategist, every plan I look at gets put through my Five Ways filter. If it doesn’t pass the Five Ways sniff test, why bother having it in the strategy? There may be a good reason, but it should be a conscious one, not the sleepwalking option.
So, what are the Five Ways? Let me pass on the lesson I got that day.
1. Sell more
If you sell more without reducing your price, or increasing your costs, then you will make more profit. Direct costs can obviously go up proportionately but watch out for the hidden step change in cost.
The simplest of concepts, but always challenging in the execution.
2. Increase the price
If it was that easy, why wouldn’t you have done it already, right? Pricing strategy is a whole complex business area of it’s own. It is essential to know your own products, and your competitor products, and their price points. If you are successful at your current price point, will you sell as much if you increase your price?
3. Reduce costs
Reducing cost is usually the “go to” idea when anyone wants to make more profit. This is as operationally challenging as it is intellectually seductive. Often more so.
Over the years I have “saved” hundreds of millions of pounds through cost saving initiatives, but it is harder, more time consuming, and more disruptive than anyone ever admits.
4. Change your mix
If you put equal effort into low margin products as you do into high margin products, are you deploying your effort in the most profitable way? Possibly. But probably not.
If you have a product portfolio that has a mix of high margin, low margin and, potentially, loss making products, can you do better? Will changing your mix of products or customers change your overall capability to increase profit.
5. Invest for profit
Sometimes spending money can be the key to unlocking increased profit.
The yield from some investments is easy to work out, but sometimes the benefits are less obvious. Spending money to make money is not always an obvious choice, and is not always the right choice. But a skilled commercial accountant can readily do the analysis that demystifies the choice and, once again, makes it a positive conscious strategic decision.
One final Lesson
The last thing about commercial finance that I would add to the lesson I got decades ago, is about sustainability of profit. The quality of profit is as important as the quantity of it.
Building a profitable business is about 3D thinking, a multi-dimensional chess game. You won’t know all the answers but you will have a gut feel. It’s not about being over-cautious, because that is unlikely to be a profitable path, but rather about conscious risk taking – understanding the implications and being ready for them.
I’ll be exploring these themes further over the coming weeks. I’ll look further at the positives and the possible downsides of each, to further develop this 3D thinking and explore the realities of this approach to help maximise profits and pass on some of that valuable wisdom.