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MAXIMIZING PROFITABILTY – How to Lead through the Lens of the Four Line P&L

“Profit is not the legitimate purpose of business. The legitimate purpose of business is to provide a product or service that people need and do it so well that it’s profitable.” – James Rouse

As stated by Business Insider, “a profit and loss statement is a report of the changes in the income and expense accounts over a set period of time”.

Revenue, Margin, Expenses, Profit. All lines of a profit and loss statement intersect at these four main categories which are the indicators of the health of your business. Revenue and margin drive your growth while the expenses are the cost of doing business. The net of the equation is profit. Revenue is the “top line”. It’s the total sales you have earned specifically within the given timeframe. Once returns, discounts, cost of goods sold are subtracted from gross revenue the remainder is the company’s profit margin. Expenses are items or services that cost the business money. These can include payroll, which is usually the largest expense for any company, benefits, supplies, rent, utilities, research and development, bad debt, advertising, insurance, taxes, etc. Once all expenses are accounted for relative to revenue and margin, the difference is net profit. Understanding what each of the key four lines look like from period to period indicates how the company is performing directionally. It indicates growth or loss.

Here are some things to consider in order to impact the P&L and maximize profit:

1. Revenue

  • Identify a forecast or projections for revenue in a future period based on impacting factors such as competition changes, a change or shift in demographics, a change in customer shopping trends, a potential change in technology relative to your business, a change in customer traffic, fluctuating inventory, marketing ROI.
  • Analyze zip code analysis. Seek to understand which zip codes correlate to where the customer traffic is driven from and which zip codes have an opportunity for impact.
  • Assess the demographics of the current customer or client base and ensure the company is a reflection of those demographics.
  • Take note of which zip codes the company has community presence in and where there is potential for volunteerism or creating mutually beneficial relationships with other organizations.

2. Margin

  • Drive more top line revenue, increased margin will follow.
  • Identify the top 20% of products/services that are driving margin and focus the company’s energy and key resources in a way that maximizes those sales.
  • Find ways to improve the quality of your product or the value of the services you offer.
  • Assess the team’s level of knowledge around high margin products/services to determine if the company’s connection with its customers is effective and credible.

3. Expenses

  • If there is overspend in payroll identify if it is tied to overtime hours, average salary or hours worked in excess of the budget.
  • Slow down to observe experience in the important areas of the company. Notate whether or not customer or client experience is adding to the expense line due to customer returns, lost customers, unnecessary discounts, an increase in customer escalations or complaints, bad debt, etc.
  • Be realistic about the state of the company’s technology. Determine whether or not it is outdated and potentially causing longer than average shipping times, process inefficiencies, long lines or other customer disappoints.
  • Partner with HR to understand if the level of talent or training process is adding turnover costs.
  • Partner with Real Estate or Operations to find out if there are any tenant changes where the company is located that may give leverage to negotiate lower lease rates.
  • Have an expert or a 3rd party evaluate the efficiency and effectiveness of your operational processes and what tweaks may improve productivity and reduce costs.
  • Determine if the company’s shortage rate is improving or depreciating and what actions are necessary to eliminate expense in this area.

4. Profit

  • If trends or impacts on the industry indicate that top line sales may decline, be proactive in strategy to drive incremental margin and/or reduce expenses to the degree that there is still a flow through of profit to the bottom line.
  • Stay connected to trends of profit month over month and year over year to understand where the company is going directionally vs just in the current period. Pivot as needed.

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