Distributors that have Line-Item, Profit Analytics (LIPA) can see and use seven different purposes for Profits to then grow them sensationally.
Economists See Three Purposes for Profits
Profits are a Cost of Capital. Shareholders want a return on their money in the business. The more risk a shareholder has of not getting their money back, the higher the return they expect. Most distributors don’t earn a competitive, (after-tax) Return On (Shareholders’) Investment (ROI). Non-employed, minority shareholders would sell for “book value” in a heartbeat and do better reinvesting in muni bonds.
Industry Profitability Dynamically Adjusts Capacity. High profits attract new competitive capacity to drive prices and profits down. Industry losses trigger consolidation, cost restructuring and capacity reduction, all of which will firm prices and increase profits.
Reinvested Profits are the Primary Source of Growth Capital for a Private Company. If sales increase, so do inventory and receivables. If you make and reinvest profits, then banks will increase loans and suppliers their payables within performance, ratio terms. Companies that cut prices to buy sales volume and sacrifice profits to reinvest will run into cash/debt crunches.
Entrepreneurs See Four More Purposes
Profits Incent Innovation. Find new ways to do either or both – increase customer value or lower process costs – then sales and/or profits grow faster.
Excellent Growth and Reinvested Profits Attract and Keep Best Employees who want good compensation today and growingly so in the future. (Some innovating people –YOU- must come first to make #4-innovation happen.)
Know the Net-Profitability of Every Line Item: — SKU; Supplier; Order; Customer; and Sales Territory – to measure big, hidden profit/loss cross-subsidies. The cross-subsidies are symptoms of root causes that financial numbers can’t see. Innovating with the insights around the root causes WILL create new customer value at lower total, service costs.
Sharing both LIPA insights and profit-gain bonuses with ALL employees will Unleash New, Highly-aligned, Total-team Efforts. Entitled slackers and coasters can’t hide. Everyone strokes in the boat or the other stroking peers kick them out.