Many successful distributors are finding that cookie-cutter business plans are not one size fits all. In fact, they are rarely one size fits most. Having searched and sampled business advice from across the airwaves as well as the Internet, many industrious HVAC distributors have cobbled together a plan that works for them. Is it profitable? They think so, but to answer that question thoroughly, it is important that distributors know what drives profitability in their businesses and then come up with a plan to increase profits.
Do they know how to do that?
Before anyone answers too quickly, take a minute to examine what Albert Bates, Ph.D., chairman and president of Profit Planning Group; and Jonathan L.S. Byrnes, president of consulting firm Jonathan Byrnes & Co., and senior lecturer at Massachusetts Institute of Technology (MIT), have to say about business profit. Their ideas are not always in line with status quo business gurus, but some of what they suggest may be a solid start in the hunt for distributors' profits.
CHANGE YOUR PRIORITIESAs distributors take a look at their financial books, one thing they often find is a large pile of dull numbers that explain the tales of success and those of woe from a distribution business' previous year. Traditionally, the key to next year's success is deciphering these numbers into a meaningful budget for the year to come.
Creating a budget, however, is not what will create profit according to Bates. In fact, thinking budgets first is something that could be considered a bad move when it comes to profit planning.
"Admittedly, having no budget means you don't know where you are going," said Bates during a recent presentation. "It's important, however, to first have a management plan."
Bates continued to explain that there are three essential elements to a management plan - profit-first planning; setting targets for sales, gross margin, payroll expenses, and non-payroll expenses; and making a plan to achieve each profit driver target.
"A management plan is when we send the accountants out of the room and management comes together and makes a simple plan with only decision-makers involved," explained Bates. "Every one of the profit driver targets must be backed by four or five things the company is going to commit to. It is simple conceptually, but takes a lot of thinking to implement. Once these plans are set, you bring the accountants back into the room and have them turn the management plan into a budget. The budget then adheres to the management plan."
Bates emphasized that planning and budgeting are important, and likely something that many distributors already do. It is the order in which they do them; however, that makes the difference. The same concept is repeated in his planning for profit. Instead of determining how much profit a business has made after the quarter is over, Bates indicated that many businesses will likely be more successful if they determine the amount of profit they would like to make and then adjust the budget and procedures necessary to meet those goals.
"Every company is different," he acknowledged, "but every company is amazingly similar in the key areas of what drives profit."
SEARCH FOR PROFITThe search for profit leads down many different roads for each business. Many distributors found this out during the economic crisis when sales dropped almost across the board. Cuts in expenditure were some distributors' responses, while others reduced inventory. Many turned to providing new services and initiatives as they endeavored to reinvent themselves. The end result for each company was different, but at the end of the economic crises, Bates noted that, "The economy drop taught surviving businesses how to be better at business, and it took the marginal players out of the playing field."
With more profit seemingly up for grabs, distributors might think the storm is over; however, it may be wise of them to ask one more question, "Is there something I am missing?"
Byrnes' research answers, "Yes."
"In my research and work with companies in a wide range of industries, I have found that 30 to 40 percent of each company's business - by any measure (accounts, products, transactions) - is unprofitable," he wrote in his book Islands of Profit in a Sea of Red Ink. "I first identified this phenomenon several years ago, when I advised the CEO of a large, successful lab supply distributor. After the entire process, we found the key to success was not to find new things to do, but instead to systematically increase the profitability of what the company was already doing."
He went on to explain that despite being seen as a solid and well performing company, this distributor began searching to increase in-house profitability and was able to do so by over 30 percent. Byrnes encouraged businesses to make sure that profitability was not only being considered and thought about on a regular basis, but that someone was in charge of managing and monitoring profitability.
"On budget and just as good as the competition is simply not good enough," he pointed out. "Even when all departments make budget, the company can still be 30 to 40 percent unprofitable."
In his book, Byrnes outlined three distinct ways to manage profitability - profit mapping, profit levers, and profit management process. These central themes are paramount to profitability success according to the author. He goes on to suggest that businesses put together a team of profit hunters.
"To be truly effective," he said, "you need to create a cross-functional team that understands how the business operates."
GET PROFESSIONAL HELPNo matter the financial place HVAC distributors find themselves currently, it seems as though they could benefit from taking another look at their businesses, customers, and profit plans. As recovery continues and new opportunities are found, old opportunities could be available right under a manager's nose. Missing these opportunities can leave a lot of money on the table, but haphazardly chasing after them is not something many businesses can survive, even if there is cash involved.
"Cash may still be considered king by everyone, but I would rather consider cash more of a rebellious prince that ought to be put into exile," Bates warned. "My question is: Why do we need cash; cash to do what? Really, most people tell me they need cash so they can invest in inventory and accounts receivable. Why did you cut it to begin with? My concern is as we've gone through this economic process we've kind of reduced our inventory and accounts receivable to the point where we can't make a profit."
Bates balanced his argument about cash with an understanding that changing inventory levels can be necessary at times, but he emphasized, "The goal is not to lower accounts receivable, but it should be let's have enough accounts receivable to drive more sales."
Distributors have many different strategies available to them, but putting them in place may require some help. A professional consultant isn't for every distributor, but with all the ins and outs of finding profit, cobbling a plan together could prove unwise.
What is your profit strategy? Head to Distribution Center's Facebook page and let us know.
Traditionally the key to next year's success is deciphering last year's numbers into a meaningful budget for the year to come. Thinking budgets first, however, is something that some economists consider a bad move when it comes to profit planning.