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The secret to a successful business is in the details. Sometimes perceived as trivial, these details are in fact very specific and closely tied to strong will and singularity.
Today, decision makers manage their organizations by focusing on increasing sales and reducing expenses independently from one another!
However, increasing sales and reducing expenses are simply the result of good management decisions and not objectives in and of themselves. They are simply the outcome of actions that end in higher or lower profit. Ultimately, the combined actions and initiatives of decision makers result in successfully meeting your profit objectives.
But how do we regularly measure the results of these initiatives to make sure we reach our profit objectives?
First, you need to visualize an organization in which the chain of outcomes is the only element having an impact on the bottom line. I can confidently say this as we have effectively demonstrated the TRUE profit these outcomes generate. Profit projections are not assumptions based simply on indirect elements such as labour reduction following an automatized project. We understand that this generally does not impact TRUE profit.
As described in Do You Really Know Why Your Business is Making Money? I explain that your organization must be viewed as a Money Making Machine in which the SALES generate CONTRIBUTIONS, which in turn pay for the OPERATING EXPENSES. The end result is the PROFIT.
This notion depends on our perspective when taking on a project. What happens when we choose to envision our business as a MONEY MAKING MACHINE, as opposed to a GROSS MARGIN MACHINE that generates profit?
Contributions are the foundation of profit
We need to manage our businesses to ensure we generate as many contributions as possible, while also minimizing our efforts producing them. It becomes a matter of focusing efforts on selling products that have the potential of generating the highest contributions. By doing this we effectively change the perspective from one where the product makes the profit to one where contributions drive business profits.
The process of setting prices must be based on potential contributions.
Businesses must update their management to the 21st century, where market evolution is occurring at an increasingly faster pace. Businesses keeping up with these changes will have an enormous competitive advantage over those who haven’t kept up with the change of pace.
This is why setting your prices cannot come from a pricing policy, but rather from the basis of opportunity that this decision creates on profit!
How does an Opportunity Management Committee work?
The real benefit of this committee is aligning sales, operations and finance toward reaching monthly profit objectives. All pricing decisions must be based on:
- The impact of the added contribution over the current accumulated contributions;
- The supplementary capacity utilization % over the current utilization %;
- The added contribution over the supplementary capacity utilization %;
- The expected PROFIT, based on CONTRIBUTIONS, minus the OPERATING EXPENSES (with or without the sales opportunity);
- The possibility of not selling the opportunity, and what would replace the potential sale.
The main objective the Opportunity Management Committee is to help identify the most important actions needed to reach the expected profit. No more trendy monthly actions that distract the management team from the essential, which is:
Profit must be the ultimate outcome of every essential decision we make.
Getting rid of superficial and nonessential decisions is a real challenge. However, an Opportunity Management Committee, where every pricing decision is based on the TRUE profit that these choices generate, can address this challenge.
Every decision must be based on this single question: “What is the impact on the projected profit if I do not sell this opportunity?”
The most important element to remember is that sales, operations, and finance, must work together if they’re to be successful and reach the profit objectives!