Does Profit Matter?

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By Ben Rand

There was a great deal of interest in Amazon’s recent earnings report.  The on-line retail giant posted 24% revenue growth to $17.1 billion, pushing its share price up over 10% and increasing its market cap to $165 billion.  But what really drew attention was the fact that Amazon showed a $25 million loss for the quarter.  In fact, Amazon has posted a loss for four of the last five quarters.  Which begs the question, does profit matter?

Profit it is often seen as “proof” that a company is providing products and/or services that are desired by the market.  In reality, good or even great products are not enough to guarantee a profit.  Hostess Brands is a recent example of a company that made many beloved, even iconic products, yet was forced to file for bankruptcy.  Remember the look of panic on Twinkie-lovers faces on the evening news?  The lesson for business owners is that it’s not enough to have great products or services, you also have to have an efficient organization to deliver them.

When I visit WNY manufacturers, I often hear that they are “in the black” or profitable.  My response is always “how profitable COULD you be?”  Is your shop really perfect?  Are your shipments 100% on time?  Is your Work-In-Process zero?  Do you measure your cycle time in minutes?  Are your annual inventory turns well into double digits?  Are your scrap and rework non-existent?  Is your capacity utilization 100%?

Obviously, perfection is impossible.  The point is, all of us have opportunities to improve our businesses.  In fact, those improvement opportunities are never-ending; as soon as you finish one project, the next one is waiting.  That’s why we call it Continuous Improvement.  The vast majority of WNY manufacturers have already completed improvement programs ranging from Lean and Six Sigma to Total Quality Management and Theory of Constraints.  Many of those companies think they are done, but they are wrong.  These continuous improvement projects may not be exciting.  They may not be sexy.  But they typically are the simplest, easiest way to increase your profit.

All of this does not mean you can or should always show a profit.  Amazon would claim it is investing in the business; plowing money into on-line grocery delivery, set-top boxes and original video content, among other things.  Growing manufacturers often need to invest, too.  So lack of profit is not always a bad thing.

Dilbert creator Scott Adams said, “remind people that profit is the difference between revenue and expense.  This makes you look smart.”  In the final analysis, profit is just an outcome, a result of many inputs and variables in a business.  So don’t focus on the outcome, focus on those inputs, the things you can control.  If you have excellent products, if you make those products efficiently and reliably, if you continually work to get better and if you judiciously invest in your business, then good things will happen.  You won’t just “look smart,” you’ll actually be smart.

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