The start of a new year is the time for resolutions. Rather than resolving to eat healthier or start a new hobby, make a commitment to conduct a profitability audit of your company, business unit, or division.
Most businesspeople associate the word "audit" with accounting, the SEC, compliance issues, or annual reports that (hopefully) demonstrate the company is reporting accurate information about its financial well-being. And when it comes to financial audits, that's all true.
I have nothing against financial audits-it's important to know that all the beans were put into the right pots and everything that happened in the previous 12 months was properly accounted for. But there's a limit to the usefulness of analyzing the past and knowing that your accounting department is doing what it's supposed to.
I propose a completely different kind of audit, one that looks at the future rather than the past. The profitability audit is about creating continuous improvement-getting better every day, every week, every month, and every year. Instead of a snapshot of your company at a specific moment in time, the profitability audit is an evolving process designed to help you make sure you're on the road to sustained, profitable growth rather than the path to trouble.
Don't blame the weather
At least once a year (ideally, every quarter) ask yourself some soul-searching questions. The answers to the questions will give you an opportunity to celebrate your success or give you guidance to make necessary changes.
One word of caution. It's easy to blame your company's current poor performance on the recent economic woes. In many cases, this is a legitimate excuse since outside forces may be causing the decrease in sales and profits. However, when the economy turns around, if company sales and profits don't rebound, you've got a problem, and rationalization won't improve the situation.
I see this as a consultant who follows the performance of dozens of companies in the retail sector. When retail sales are off, management blames things like the weather. "It hasn't been cold enough for people to buy winter coats" or "It's too cold for people to buy spring clothes." Sometimes these observations have merit, but there are always best-of-breed retail companies whose sales increase no matter what the weather conditions.
Before you read the questions you should be asking to assess your company's performance, let's quickly review some terminology.
Core customers are your company's biggest fans. They love the products or services your company sells, and they're willing to pay a fair price for them. Core customers are loyal, easy, and inexpensive to deal with and stick with your company even after a promotion ends.
Must-have customers are potential customers who look a lot like your company's core customers. They're already buying products or services that are very similar to what you sell, and they're paying similar prices. Must-have customers are the ones you need to convert to core customers to build sustained, profitable growth.
A super sweet spot is a power niche that will enable you to successfully compete-and win-against the strongest competition. In super sweet spot companies, every element of the business is crafted to serve a very specific group of customers in a specific way. This means that every decision you make, such as what products or services to sell, which employees to hire, and what advertising to run, supports your customer-relevant super sweet spot.
Here are some of the questions you'll need to ask yourself for the profitability audit:
- Does your company have a super sweet spot that sets it apart from your competition?
- Does every decision you make reinforce your company's super sweet spot?
- Do you know your core customers' rules for doing business with your company?
- Are your core customers spending a larger or smaller share of their budget with your company? Why?
- At what rate are you turning must-have customers into core customers?
- Are you getting better at hiring the right people for your company and putting them in the right jobs?
- Are you losing your best employees? Why?
- Are you listening to what your best employees are telling you about how to improve your business?
- Is your advertising effective at persuading core and must-have customers to buy your products or services?
Every answer should be quantifiable and trackable. Remember the axiom "You can only manage what you can measure." You should also review the most recent customer research and sales and profit reports to accurately assess whether what you've been doing so far has been moving your company in a positive direction or not. Rather than debating opinions, your management team can now thoughtfully discuss facts and effectively plan the future.
With a little luck, your profitability audit will show that you've set your company on a steady, forward path and that all you need is a little tweaking to optimize your results. You've created a super sweet spot that would-be competitors can't touch, you know your customers' rules, and you're turning must-have customers into core customers.
You'll be able to implement plans for your company built on this factual information, and you'll have a significant competitive advantage that will be difficult to overcome. You'll also provide reassurance to your employees and shareholders that your company, division, or business unit has a profitable and bright future.
If you're not quite that lucky, the audit will reveal exactly what you're doing wrong and highlight the specific problem areas you'll need to correct. If this happens, don't feel badly-it's a rare company that doesn't identify at least a few areas that demand some significant improvement. You'll need to analyze the data you've gathered (or gather some if you haven't already) and adjust your strategy so you can achieve your goal of building sustained, profitable growth.
The profitability audit should not be a one-time event; it's a process that should never end. You should conduct this audit at least once a year. Twice a year is better. A quarterly review is the best and will give you the information you need to make continuous improvement.
When you build a record of sustained, profitable growth for your company, you'll be glad you made the effort to conduct profitability audits on a regular basis.
Robert Gordman is president of The Gordman Group (www.gordmangroup.com) and the author of Do You Know What You Don't Know?, Secrets of the $uper $weet $pot: Building Sustained Profitable Growth, and The Must-Have Customer: 7 Steps to Winning the Customer You Haven't Got, named one of the 10 books you should have read by Ad Age. His clients have included Berkshire-Hathaway Retail, IBM PC Company US, Saks, VF Corp., Weight Watchers, and Whirlpool.
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