www.randymaclean.com Randy MacLean

The Seven Limiting Beliefs That Prevent Profits

Randy MacLean

In my advisory role as a profit expert for industry executives, I've noticed certain tightly-held beliefs that prevent leaders from seizing obvious opportunities that could take their companies to record levels of profit and cash-flow. An often-overlooked benefit of analytics is that they directly refute these beliefs, freeing executives to innovate and lead their companies into the future.

Long-tenured leaders are frequently captives of their company history, where long-standing practices seem "normal" and "right", and company inertia guarantees slow decline in profits as annual pay increases eat into a near-static market share.

Here are the seven most-common limiting beliefs that absolutely prevent leaders from taking their companies into the future, and are completely disproved by analytics.

What Got You Here Takes You There

Today's market abounds with new opportunities as vendors, distributors and customers continue to optimize organizational and relationship efficiencies. An optimal business model for 1999, or even 2009, is no match for what the best companies are doing today and planning for tomorrow.

Any standout success in your company's past will not have been due to the change in activities that drove it, but rather in doing whatever it was when the competition didn't.

In NASCAR, winning teams are continuously inventing new things to get a small edge each year. Those that rely only on doing what was "state-of-the-art" in the past are the ones that run in the back of the pack. If your company isn't inventing and implementing new and improved procedures and practices, for both sales and operations, each and every year, you'll have to get used to eating dust.

The key to discovering better practices isn't out in the market, or in a magazine you read—it's most often found in your own data. This is what analytics are for. There's no place on earth that's more reflective of what your company does, or what your customers want, than in your own data.

It's All About Our Products

In distribution we buy product, sell product, inventory product, and train on product. To our very great detriment, we've become product-oriented.

In reality, no product is inherently profitable on its own. Profits are determined in how products are purchased by customers. For instance, a $25 item sold and delivered by itself is a guaranteed loss, but when sold in quantity or added to a large order, it's a profit enhancer.

You can't manage profit by working directly with products. Profits are driven by working with customers on how products are procured and how much company infrastructure and resources are consumed in doing so. This is what advanced analytics are for.

Yesterday's market advantage from exclusive products or territories has been replaced by operational advantages from exclusive understanding of profit drivers from advanced analytics, and action capitalizing on this knowledge.

You Can Do the Math in Your Head

The reason why everyone is talking about analytics is because simple math can't give you the insights driven by the complex interactions of vendors, products, sales, operations and customers inherent in your business model.

Advanced systems track the millions of individual intersections of these elements, delivering surprising (and, often, counter-intuitive) insights into profit-generation, and are coming into broad use because they give companies an edge.

Clearly, adopting profit-driving practices that less-capable competitors fail to recognize confers market advantages, and deep analytics reveals a broad range of these opportunities.

Gross Margin Drives Profits

A decade of experience overseeing tens of billions of dollars in distribution transactions completely refutes this. Gross Margin is almost completely disconnected from profit, and is in no way a reliable indicator of profitability.

There are three elements of a profitable sale, or a profitable business: volume, pricing and costs. Gross Margin is a measure of pricing only, so it cannot suggest actual profit in any way because it does not account for the other two elements. It's like trying to measure distance when you know the direction, but not the starting point or the destination—it's impossible. Nobody can get anywhere when your navigation direction is always "West."

This is why gross margin management is a lousy way to run a business, and why initiatives that manage or drive gross profit almost always fail to improve the bottom line.

As an industry, we've mastered the volume and pricing part of the equation, so today's companies are rising to the last challenge by employing advanced analytics to clearly understand what can be done to manage complex interactions that drive costs and therefore profit.

Most Sales Contribute to Profit

This is what I believed ten years ago, mostly because I was also trapped by the belief that gross margins were profit-related. Since our margins were at or above acceptable levels, I thought every sale made a small contribution to the bottom line.

This deadly belief leads directly to the biggest misconception in distribution management—that since almost all sales contribute to profit, getting more sales is the path to higher profits. Really, most sales lose money. In fact, our research shows that 62.5% of all invoices in distribution are money-losing sales! Statistically, increasing sales will reduce profits.

In this shocking statistic is the insight that can almost guarantee substantial profit gains—that is, profits aren't improved by having more sales, they're improved by shifting the balance between money-making and money-losing sales. This one intuition has done more to rocket profits upward than any other. Companies recognizing and acting on this lead their industries, markets and associations in profit generation. They don't need bank lines and they don't pay interest.

Sales Headcount Drives Profits

If you believe that all sales drive the bottom line, then you also have to believe that the best way the drive those sales is with lots of sales reps. This is a painful hangover from the glory days of opening new markets, when more accounts meant more business.

Today, almost all distribution companies have 1.5x to 2x as many sales reps as they need, or can afford. This can easily be seen in territories that have 100+ accounts, most of which are too small to be profitable if commissions are paid on their sales. (Rule of thumb: 6 calls per year @ $100 cost / call @ 25% margin @ 25% commission = $9,600 annual revenue. Accounts below this mark are not likely viable for commissions, yet are the bulk of commissionable accounts in most territories.)

Frankly, having too many sales reps makes it impossible to pay good reps enough, and this is causing great difficulty in hiring the younger reps we desperately need to work effectively with their younger counterparts, in our customer accounts.

Our ERP System Tracks and Reports Profit

Executives rely heavily on ERP and financial systems that simply aren't designed to calculate detailed cost and profit. At their core those systems were designed to manage inventory, receivables, and to provide company-wide profit numbers sufficient to please the bank and the IRS. That's it. Any branch or territory level profit numbers are based on estimates on a spreadsheet someone cooked up months or years ago, and are no more indicative of real profit numbers in current and future periods than the phases of the moon.

A company can have accurate profit numbers at this level only when they use a cost and profit analytics system designed for that purpose, and then put the numbers it produces back into the accounting system.

Lose Those Beliefs!

Shaking yourself free from the seven limiting beliefs will open vast new opportunities for your company and your own performance. Being a market leader is a matter of math, not history and not luck. Throwing off the chains of conventional wisdom and of past practices, embracing and adopting a numbers-driven stance opens the door to tremendous opportunities for profit growth. Executives routinely deliver profit gains 2x and 3x their previous rates. Free yourself to lead your organization into a future driven by numbers and operational reality. Beware of your limiting beliefs, and use analytics to guide your company to outperform your association, your market and your company's history.

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