ask SCORE: Maintaining Profitability Over the Long Term
Maintaining Profitability Over the Long Term
Manage the Present While Creating the Future
By Richard Walton
Assistant District Director for SCORE
There is a concept derived from biology concerning how systems decline over time. The concept is called entropy, and it manifests itself in people, businesses, and even ideas. It is the progressive decline over an extended time period, so slow in some cases that it won't be noticed until something goes very wrong, such as an individual suffering mental or physical disability, or a business becoming insolvent, or an idea becoming obsolete.
Business are susceptible to this gradual decline due in part to their maintaining the status quo, in other words, the mantra is 'Keep doing what we have been doing, and don't take chances'. While this may be the normal reaction from times past, it is no longer a viable option today given the speed of change brought about by new technologies, globalization and the rise of the educated consumer. It can be stated even more simply: Don't make any changes, and the world will pass you by. This goes for all types of business in all fields, whether large or small.
But the good news is that there are ways to avoid what has been called inevitable decline, and the message of this article is to address what can be done to maintain viability (and profitability) over the long run. There are two keys to long-term profitability: 1): maintain and improve the present business, and 2): through innovation and collaboration create the business of the future. The two ideas working simultaneously are the keys to really effective small business management, now and in the future...
THE PRESENT BUSINESS
The present business is where profits have been earned in the past and the present through the patronage of loyal customers and tried and true products. The only things lacking are sustainable profitability and growth. The present business needs to be re vitalized through managing the forces of change and current operations process.
Change need not be automatically disruptive. It can be productive of new ideas and new ways of doing things. We should be asking every day, 'What are we doing that we should not be doing, and what are we not doing that we should be doing'. Firms need to anticipate the need for change and be proactive in using change management to improve their business.
In addition, business processes (and products) should be examined for ways of reducing costs and increasing revenue. The biggest cost area for most small businesses is the cost of production. If a business is showing a 40% gross profit margin, that means that 60% of the sales dollar goes into the cost of producing (or buying) the product. It also means that this is the largest cost area in the business, and is therefore the best target for improvement. If the business is running at breakeven (as per the example above) 40% of the sales dollar is going to overhead and administrative expenses. Process changes can make a huge difference in the level of cost (and therefore profit) for any business. If as the old refrain goes, 'We've always done it this way', it's time to look carefully at how it might be done a different way and be more productive.
The management of change and operations are the means to improving the present business. And while that is the first of our two phase profitability program, we need to simultaneously work on the future business.
THE FUTURE BUSINESS
The future business is where expansion and growth will come from through innovation and collaboration in the development of an entirely new business model... In creating the future, we need to be open to new ideas and potentially disruptive technologies. A new business must be based on new ideas, and new ways of doing things, not merely an updating of the present methods and techniques.
Innovation can be focused on new products or on new systems of developing, producing and distributing existing products. Innovation can also be based upon a new method of solving a problem, or a complete change of direction with new products and new markets. The most valuable company in the world today is Apple, a former computer maker, which has created entirely new industries through its innovations in music (iPod) and tablet computers (iPad), as well as others. While it may not be feasible for a small firm to undertake world changing innovation, it is possible to find ways to save money for customers, increase sales, and reduce internal costs, each of which can be the basis for an entirely new company.
We have to be looking both inside the business and outside through a complex view of the world unbounded by any restrictions of time, place, or resources. This is where collaboration comes into play. No business needs to work completely independently. The literature of new business startups is full of references to innovators who saw a need and found a way to meet it, not by relying only upon their existing resources, but through collaboration with other firms, potential customers, suppliers, even competitors. Crowd sourcing and crowd funding models can serve as examples of collaboration that can provide any business with the foundation for a quantum leap forward in growth and profitability. With the right combination of initiative, innovation, and passion a small business could become one of the future businesses that just might change the world. And you can be done of them!
Managers need to work simultaneously in the business through improving the present, and on the business, through creating the future. The usual problem of doing these two important jobs simultaneously is that the squeaky wheel of the present often trumps the less noisy wheel of the future. That is until it becomes squeaky enough to dominate everything. What needs to be done each and every day is to work in the present and on the future simultaneously and thereby both maintain the profitability of the present business while creating the future business which can bring new and growing profitability.
Mr. Walton teaches Financial Management, Operations Management, Corporation Finance, and Entrepreneurial Finance at Frostburg State University and is the assistant district director for SCORE, Western Maryland, and is president of ERMACORP, a Hagerstown based Management Consulting Firm. Call 301-462-9850 or him at Richard@ermacorp.com. Find him on Facebook(r) at "Small Business Life Cycle" for inquiries and an exchange of ideas on small business management, issues, resources, and experiences.