Profit Focused Strategies for Tough Times

October 23rd, 2008

Tough economic conditions will stress all businesses and present challenges and hardships. Dealing with these challenges is the key to survival. The survivors will be those business owners who utilize an effective strategy combined with the right accounting and measurement tools to keep their business on track. I think this is a good time to talk about profit focused strategies and how to apply profit focused accounting techniques so they work to your advantage.

Profit focused strategies are based on developing effective strategic plans using lean accounting and throughput analysis to increase sales and cash based profitability. Whether your business produces a product or provides a service it is important to understand which customers, products and services generate the greatest amount of profitability. A lean accounting analysis is critical in determining the variable margin by each product and customer.

This information should be utilized to assess your productive capacity and then focus on adding volume and capturing market share based on your strategic plan. Another management and analytic tool that should be utilized is the application of activity-based management. Use these concepts to evaluate your capital investments and overhead costs in order to make the best decisions for the long haul. Another key element is developing a balanced scorecard to help select the right measurement and indicators to monitor progress toward achievement of your strategic goals and objectives.

I know this sounds complicated, but in reality it isn’t that difficult. It is a process of analyzing the sales or throughput for your business and getting it aligned with the variable costs and other expenses associated with generating those sales. Based on this information it is critical to develop strategies for increasing market share together with the pricing strategies that will provide the desired market penetration. Effective analysis of the cost drivers within your business will allow you to make more informed decisions about where and how to strategically focus your efforts. When selecting your key measurements be sure to identify both financial and non-financial indicators for tracking your strategy using a blend of financial, customer, process, and employee related factors.

Remember that cash is king. You need to install the discipline in your business processes to make sure you are focused on the creation of cash from your market penetration strategies. It is the economic profit that shows up in your bank account that really matters. Therefore, put your emphasis on creating economic profit and cash flow. This is where lean accounting and profit focused strategies will pay off. Another benefit of applying profit focused accounting is that understanding your financial statement is a lot easier. It is like looking at a breakeven analysis every time you review your profit and loss statement.