Service Excellence: Manage Profitability

Profits are essential for any business. Unless there is a sufficient profit margin, the business cannot exist. The jobs it provides, the products and services it delivers, and the contributions it makes to the community would cease.

All managers play a role in an organization's overall profitability. Some managers are responsible for generating revenues, others are responsible for making products or delivering services, and still others are responsible for helping the line functions do their jobs.

To be a successful manager, you need to manage your financial responsibilities. This is much more complex than just increasing revenues and keeping cost low - it also means managing assets and liabilities.

To manage profitability, you need to understand how the organization makes money and your department's role in that process. You may need to set financial goals, work with sales and marketing to determine pricing and volume, determine whether and when to make capital expenditures, identify ways to reduce costs, justify investments, and so on.

Here are some guidelines and suggestions for effectively managing profitability, including:

Understanding Financial Management: Sometimes the biggest obstacle to effective financial management is simply a manager's lack of understanding of financial terms and processes. Often just learning the basic financial principles allows managers to use financial processes and reports thus improve their work unit's profitability.

Setting Challenging Financial Goals: The first step in managing for profitability is establishing financial goals and a budget that is realistic, yet challenging, in its profits objectives. You may have the responsibility of actually setting goals, or you may input to others for goal setting and budgeting.

Managing Against Your Financial Goals: Once you have establish your financial goals, your next responsibility is to manage effectively so that you stay on course and come as close as possible to achieving them, to help you do this, follow this process:

Identify the three to five key cost and revenue areas that will make or break your financial goal. Get to know the operations of the areas that make up your costs and provide revenues. Talk with the people who know how these areas operate, the impacts they have, and the ways in which they are affected by other forces.
Ask your manager, your employees and, if appropriate, your peers for their opinions on which of your budget items are the key ones.
Determine how frequently you need to see reports comparing budget projections and actual.
When you receive the reports, monitor them carefully to see how your budget is working.
Plan in advance how you will handle significant changes in your budget projections.
Conduct formal monthly reviews. Use the reviews totrack status and progress against goals, understand what is happening, and make changes in assumptions and forecasts if necessary.

Looking for Ways to Reduce Costs: Becoming cost-conscious and continually looking for ways to to reduce costs is one way that you can manage for greater profitability. Although you are undoubtedly aware that long-term goals and strategies sometimes require expenditures that won't contribute to short-term profits, for the most part it is helpful to look for ways to reduce costs wherever you can.

Pursuing Ways to Increase Revenue: as you know, you can increase revenue by increasing sales or by increasing the price of your products or services. however, increasing sales without concern for profit margins or increasing prices without knowing the impact on sales is both shortsighted and naive.
The primary responsibility for sales and pricing belongs to the sales and marketing departments. It is important to understand this process and monitor what you are getting, especially if you have overall responsibility for the business unit.
In addition, managers these days also are concerned with internal suppliers and customers. many managers are internal suppliers and, in turn, are also customers. You sell to your internal customers and set prices. many of the same principles of selling and pricing are involved internally as well as externally.

Analyzing and Justifying Capital Expenditures: managing profitability includes spending money wisely. When you or your employees have identified capital expenditures that are believed necessary, conduct a through analysis of actual total costs and expect benefits. Include the following in your analysis:

Cost of identifying vendors and suppliers
Actual capital cost itself
cost of implementation or change, including training needed
Intangible costs, including stress and inconvenience
Expected benefits, both tangible and intangible
Cost or impact of not making the expenditure

Ask your staff to make this kind of analysis for all capital expenditures, so you can make more informed decisions.

Involving Employees in Financial Management: Your employees can be your best allies in increasing the profitability of your department or area for which you are financially responsible. Involving your staff members in every aspect of the budgeting process to which they can contribute can yield many ideas for improving profitability.

Managing the Perception of Your Profitability Management: Some managers believe that they already are managing aggressive financial goals, but others may not share that perception. If this situation occurs, first collect additional information by answering these questions:

How do your goals compare with others in the organization?
How aware are others of your attention to the organization's bottom line?
What's the perception of the opportunities available to you for contributing to profitability?
How does what you do in your area compare to how other managers approach their financial responsibilities?

This analysis will identify the areas of discrepancy between you and others. Then you can determine a plan of action that may include: