The Five Disciplines of Profitability

Profitability is no accident!

In fact, profitability starts with a mindset. It also requires written plans, budgets, and talented management and employee teams to execute the plan. Without the mindset and the determination to be profitable, most companies will not achieve maximum profitability. I refer to this mindset and the action it inspires, the discipline of profitability.

Webster defines discipline as a set of methods or rules of conduct. Here are five disciplines frequently found in well managed, profitable companies, with sustainable cash flow. These same disciplines are missing in troubled companies.

1. Run your company like you are going to sell it or borrow a lot of money!

The best run companies are run by owners who either have an exit strategy or are looking for funding. They know their business will be seriously scrutinized before any investor funds them or buys them. They also know their company’s valuation and/or credit worthiness is dependent upon the strength of their margins, management team and their business practices.

2. Plan your work! Work the plan! Measure the results! Know your numbers!

Well managed companies have written plans. Budgets are developed for each profit and cost center and someone in the company is responsible for controlling, monitoring, achieving each and every line item on the Income and Expense Statement and Balance Sheet.

Plans and budgets are prepared for the New Year before the end of the current year. This provides twelve full months to execute the plan. If you start planning in January and are not finished until March, your company just lost 25% of the year.

Routine monthly financial and business review meetings keep a company on track. Variances from plan or budget typically start small. If you catch them early in the year you have the chance to correct the problem and get back on track.

3. Gross Margin 101A

Know a company with high gross margins? It probably has a healthy operating margin. Know a company with poor gross margins? Lousy bottom line right? That is the way it works!

Fat gross margins are beautiful. They are fed by many disciplines with the most important one being a minimum gross margin percentage that is non-negotiable. This discipline may be the most difficult to practice consistently. There will be lots of solid rationale for lowering prices, accepting higher vendor costs, and poor production performance. Don’t do it! Guard your gross margin, its your best friend.

4. Cash is King!

If you want to be paid on time, mail voices promptly and accurately. Then ask to be paid on time. These are basic business disciplines. If your company struggles with cash flow problems revisit these critical functions, you may be surprised at what you find. Remember accounts payable clerks are the most important people in the world and nobody gets paid until they say so. Don’t believe me, try to get paid on time by one who thinks your invoice isn’t right!

5. Make decisions and commitments stick!

Accountability is a discipline and it starts with the owner/president. Employ an outside Board of Directors/Advisors, mentor, or consultant to keep the owner on track. Keeping the owner on track sets the example for the rest of the company.

Want to Get Your Whole Team on the Same Page? Download “The Future of Planning and Performance Management – An Executive Briefing”.