The Five Point 'Profit Protection Plan'

Business cycles come & go. And if history is any evidence then the cycles also get 'repeated'. The nature of the cycles undergoes a time frame change & a characteristic change although the broader 'structure' remains the same. Arguably the goal of the organization also shows continuity over the history & the overarching goal although is 'creating / preserving stakeholder value' the more commonly understood goal is 'Profit'.

The current industry cycle seems to be of demand contraction hence decelerating revenues & profits. I was wondering what may constitute a 'Profit Protection Plan' for organizations. My five point agenda for Profit Protection is;

a. Target Volume - It is unlikely that one enterprise has a capacity which exceeds more than quarter of the total market demand. Need to redefine markets & start selling more to the ones who you didn't sell.

b. Price - Think 'service'. This is where the premium to the product comes from. Else ask do you have idle capacity? For all the idle capacity one has the sales price of the product can be only the variable costs. Start thinking new ways of pricing.

c. Reduce Cost of Goods Sold - A demand contracted phase is the best one to lay down the Supply side contracts & prices. You can lock your suppliers at favourable price points & contractual terms to overcome this phase as well as ride on that during the boom phase. Immediately take up improvement projects to improve productivity.

d. Rationalize Assets & Expenses - Profits get eroded the most due to inefficient utilization of assets. Rationalize your assets. Benchmark your Sales  Distribution expenses with the best in class. Typically in consumer business with multiple channel partners dramatically reduce your expenses. It may also mean creating a new supply chain structure.

e. Working Capital - The time difference between cash going out of business & cash coming into the business is the most vital operating level plan for protecting your profits. Manage the flow with new ideas. Data suggests 30% of working capital is blocked in 'Inventory' alone. Act on improving the operating cash flow.

If you have a Profit Protection Plan you may survive to live the next business cycle & be much healthier to leverage actions of the current phase into the next phase.

P.S. - I wish organizations don't take actions to protect profits which lead to cutting the bones rather than the fat. Bones for me is 'People', their energies at the workplace, their motivation, their ownership of the tasks, their feeling of belonging....AVOID killing that for an incremental return but a permanent loss.