How Profitable Is Your Business? How Profitable Should It Be?

by Paul Schlossberg
Posted On: 2/13/2019

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  Paul Schlossberg
You are not required to answer those two questions. Not to me, anyway. But you had better be able to answer the questions for yourself.

Unless you are in this business for fun, the scorecard measuring success is based on profitability. If your company is operating at a loss, it won't be much fun for you until you get back to being profitable.  

And it's not about just being profitable this year. The critical thing is operating at a profit year after year for a long time. It's easy for me to write those words. Doing it over and over for over a long time:  that's not easy at all.   

In my mind is a distinct recollection of a conversation I had with a vending operator a few years ago at a NAMA show. The timing is important. The economy and overall business conditions had worsened – especially for our industry. He was describing what he had done to recover from, and then get ahead of, the economic downturn. This operator, who will not be named here, talked about the actions taken and investments made to bring his business back to a profitable position.

Two things were significant. First, he realized that he had to keep on innovating and investing for the long term to sustain and improve the profitability and the viability of his company. Second, and the best part, was that this process was the most fun he ever had in his work experience.

Here's a quote, from Peter Drucker1, that is applicable: "The only results for your company come from outside the company -- anything inside the company is a cost."

This is not the place to explain all of the aspects of sales revenue and expenses that are included in income statements – aka, profit and loss statements and P&Ls. Do you use an accounting software system to generate a P&L? What frequency are your P&Ls prepared? Is it monthly? Is it quarterly? It is a requirement at a minimum, for taxes, to prepare an annual statement

By the way, there are only two ways for you (or any business) to increase profitability. You can:
(1) Sell more stuff, at a profit, of course.
(2) Reduce the costs in your business.

It has been said about reducing costs that "you cannot save your way to prosperity (or profitability)." You should be well aware, by now, of my emphasis on selling more stuff. But never forget that there are shrewd steps to take in managing and reducing your operating costs without ruining your company's ability to serve your customers efficiently and effectively. We will not dig deeper on the subject of cost reduction at this time.  

Let's imagine that it is the end of your operating year. As you look at your P&L, it is good news. Your company made a profit and it turned out to be an increase over the prior year. That's great. Congratulations! But it is not enough – not nearly enough.

What can you do to determine how good the results were versus what other similar companies achieved? Are there any indicators you can use to see if there are specific opportunities to generate additional profit?

Let's look at some examples. In the convenience store business, the National Association of Convenience Stores (NACS) conducts research annually to summarize key operating results across their industry. It is the NACS State of the Industry Report. It gives operators a comparative dataset to see how their business stacks up against other c-store companies. We have used the NACS data in the past for client projects.

The process is benchmarking. According to Wikipedia, "Benchmarking is the practice of comparing business processes and performance metrics to industry bests and best practices from other companies." It allows you to determine whether your results are better or worse than comparable companies. Are your labor costs too high? Are your sales and gross margins as good as what others are generating? Knowing those things, you can focus your action plan to improve results in very specific areas.

Ask your accountant or CPA about SIC Codes and how to use SIC code data for benchmarking purposes. What are SIC codes? The Standard Industrial Classification (SIC) System classifies industries with four-digit code numbers. For us, Automatic Merchandising Machine Operators, the SIC code is 5962. With some work, comparative data can be found within our SIC grouping. You want to find clear comparisons to the results achieved by other similar companies.

Looking back, NAMA had done research on performance and comparative results in our industry. The NAMA Operating Ratio Report was a very useful resource for projects we were working on in years past.  

You need to pay careful attention to your P&L. Analyze it. See what you like and what concerns you. Focus on improving performance on every line and all of the details that make your sales and expenses. If you can get comparative performance data, it will be a huge benefit in directing your attention to where you are doing better than other companies and where you must improve.

If you want to be more profitable over the long-term you have to sell more stuff. And, you must learn how to manage your costs. Do those things well and you'll have taken another step on the road to operating profitably.  

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1 According to the Drucker Institute, "…Peter Drucker was celebrated by BusinessWeek magazine as 'the man who invented management.'"






» Paul Schlossberg is president of D/FW Consulting, working with clients to merchandise and market products in impulse-intense selling environments, such as vending, onsite foodservice and convenience stores. Based in the Austin, TX, area, he can be reached at Paul@DFWConsulting.net or (972) 877-2972 or www.DFWConsulting.net.