The ten key profit drivers

opportunity-21We once tried to convince a Madison Avenue advertising firm about trying to assess what value they would bring to us. We were looking to hire them to help with some branding work but we were having a tough time making connections between what they were proposing and what we felt we needed. We suggested they do something similar to what we do to try to convince someone to hire us. Before a client ever hires us to work for them, we undertake something we call an Opportunity Analysis. It’s a kind of due diligence to determine if there are any opportunities where we can help a company improve, above and beyond what they are already working on. The basic concept is to assess the performance of the operating environment and link the historical outcomes to the organization’s financial results. By using studies of real time operations, the analysis becomes a living picture of the organization, rather than a PowerPoint deck of typical platitudes about how to improve. It also allows the approach to incorporate cultural issues, which are sometimes overlooked when the focus is on technical issues.

We asked them to adopt a similar approach so that we could better understand what value they would provide. We invited them to critique our existing methods so we could understand what was lacking and where they thought they could guide us. We even suggested we could provide some of our own staff to help with the analysis. They told us branding had tremendous value, but it was impossible to measure directly to outcomes. We suggested maybe some link to an increase in sales? We were swiftly told that we were kidding ourselves if we thought we could impose our worldview on the advertising industry. The relationship didn’t work out.

We prefer to think about cause and effect in more simple terms, believing that in many cases there is a correlation between actions and outcomes. So when we look at organizations to assess opportunity, we focus on these key profit drivers:

  1. Revenue
  2. Material cost
  3. Direct labor cost
  4. Indirect labor cost
  5. Fixed overhead costs
  6. Variable overhead costs
  7. Accounts receivable
  8. Accounts payable
  9. Inventory
  10. Cash

We make the assumption that doing things differently should have some effect on one of these key drivers. If not, then we have to question whether the different actions are actually worthwhile. In the next ten Opportunities we will look at each driver and provide some more detail on what we look at and how we derive opportunities.