The Profit Equation

Profit is a function of Expense, Loss, and Revenue

It is impossible to cut one’s way to growth and prosperity. Profitability is determined by a combination of revenue optimization, loss minimization and expense reduction.

Conventional Cost Reduction Programs work only in the arenas of Expense and Loss…and usually just expense (cost reduction). People are exhorted to cut, cut; cut. The net result is quite often a feeling of insufficiency and hopelessness. It is impossible to cut one’s way to growth and prosperity.

The Profit Improvement Process engages all three of these elements in a positive and proactive manner. The net result is growth concomitant with reduction in waste and a redeployment of assets in more positive and fruitful directions. Other programs tend to focus on expense and, to a lesser degree, loss. The Profit Improvement Process supports revenue growth when others impede it.

People all too often get the short end of the stick in cost reduction. The Profit Improvement Process is designed to help people and companies prosper.

Revenue

Revenue is overlooked in Cost Reduction and Cost Cutting Initiatives. Revenue just isn’t part of the cutting equation.

Cutting, cutting and more cutting not only reduce costs but they also undermine the enthusiasm and good will that are critical to growth. Some companies take decades to recover from cost cutting campaigns if they ever recover.

The Profit Improvement Process (PIP) is more effective because it focuses on loss and revenue in addition to expense. There is room for growth and a future with a Profit Improvement Program.

Examples of avenues for revenue growth include:

  • Increased selling prices
  • Reduced selling prices (volume growth/market share growth)
  • Increased sales of existing products to existing customers
  • New products to existing customers
  • Retreat from sub-optimal businesses and/or customers
  • Product line variations and extensions
  • Bundled products and services
  • New markets for existing products
  • New products for existing markets
  • New products for new markets

What PIP Does to Revenues:

The Profit Improvement Process (PIP) focuses on the profitability of sales. Key points about revenue management include:

  • Revenue growth is a focal point of the process to keep the company vital and alive.
  • Provides a forum for the fair evaluation of revenue opportunities.
  • Recognizes that you usually cannot sell yourself out of bad businesses. You just can’t make it up on volume when the contribution margin is negative.
  • Puts management focus on what’s right for the company. It is quite often easier to have your old ideas approved.
  • Builds teamwork between the various factions in the company that might have stood in the way of progress.
  • Helps educate people on what constitutes profitable business.
  • Facilitates better business decisions.

Expense

Expense is the piece that is most often attacked in a Cost Reduction Project (one-time) or Process (ongoing). Everyone is often told to cut back until it hurts and then cut some more. Cost reduction hits the national business news on an almost weekly basis as big name industries announce across-the-board cuts of 5, 10, or even 20%. People usually get the short end of the expense reduction stick and the implications are wide ranging and severe. Studies consistently show that across-the-board personnel cuts do not lead to long-term corporate success.

The Profit improvement Process (PIP) is effective because it focuses on loss and revenue in addition to expense. Everyone in the company is engaged in a positive approach toward building a stronger and more profitable company. People win with a PIP.

Examples of candidates for cutting in Cost Reduction include:

  • Travel & entertainment expense
  • Office expenses
  • Office supplies
  • Manufacturing supplies
  • Wages & salaries
  • Utilities
  • Paper
  • Copy machines
  • Printer costs
  • Insurance costs
  • Rents
  • Telephone & other communication expenses
  • Automobiles
  • Conventions and trade shows
  • Memberships
  • Maintenance costs
  • Consulting

What PIP Does to Expenses:

The Profit Improvement Process (PIP) identifies, quantifies, and prioritizes the areas of excess expense that your business is experiencing. Priorities are addressed to increase profits. Key points about expense management include:

  • Every dollar of expense that is removed reports directly to the bottom line.
  • Training creates an awareness of what being a Cost-Effective Organization is and expenses drop even before specific projects are identified.
  • Priorities are set and excess expenses are adjusted in order of that priority.
  • Checks are made to ensure that nothing is cut too deep…resulting in higher costs.
  • This is a positive approach to expense management.
  • In some cases expenditures are increased because the case is made that there will be a return on that investment.
  • Revenue growth is kept in the picture to keep the company vital and alive.

Loss

Loss represents the wastage of resources. The loss component of business is usually overlooked unless a Total Quality Management system is in place to raise awareness. Following is a list of resources, the ways that they can be wasted, and a summary of how a Profit Improvement Process (PIP) can impact losses.

Resources that can be conserved to save money and improve revenues include:

  • Time
  • Money
  • People
  • Good will
  • Knowledge
  • Culture
  • Work environment
  • Materials & supplies
  • Work in process
  • Finished goods
  • Avenues of loss include:
  • Quality rejects
  • Insurance losses
  • Theft
  • Inefficiency
  • Time delays in product development
  • Lost or unrealized productivity
  • Employee turn-over
  • Strikes and slowdowns
  • Wastage
  • Spillage
  • Returns
  • Warrantee costs
  • Unretained (lost) customers

What PIP Does to Losses:

The Profit Improvement Process (PIP) identifies, quantifies, and prioritizes the areas of loss that your business is experiencing. Priorities are addressed to increase profits. Key points about loss management include:

  • Every dollar of loss that is removed reports directly to the bottom line.
  • The elimination or reduction of losses give an immediate and favorable impact to bottom line profitability
  • Reducing losses can increase sales – improved quality and/or productivity
  • Reducing losses often increases profits without any negative impact. Most often the impact is favorable as quality improves

Power Idea Sessions and the Profit Improvement Process tap the intellectual capital of your people to help you help them achieve increased profitability and better corporate health. These methods are described in our world-class book which is foundational to our World-Class Cost Reduction and Profit Improvement Training which has delivered hundreds of millions of dollars to the bottom lines of businesses around the globe.