Profits? What profits?

Profits -- more often than not, they are not exactly where they should be. Most business owners and managers face this problem. For many, it is an ongoing battle requiring calculated and creative decisions and solutions that cause managers and employees to scramble.

There is rarely an easy solution to the profitability problem. The appropriate solution(s) to this problem varies dramatically from one business to another depending on the specific nature of the problem; the size and maturity of the business; the availability of human, technical and capital resources; the market and the competitive environment, just to name a few.

However, one can take some comfort in knowing that any solution always simplifies down to two things: revenues and expenses.

Having worked with many managers of small, mid-size and large organizations in the areas of manufacturing, construction, technical fields and service, I have come to the broad conclusion that at any point in time, most businesses approach profitability in one of two ways.

The first and perhaps the most common approach, one that I refer to as the entrepreneurial approach, is primarily focused on increasing revenues -- sell, sell, sell! The theory is that if a company pushes to sell more, introduce more products and bring on additional sales people with aggressive sales targets, it can meet sales goals, resulting in the necessary revenues to hit profitability targets. The mindset is that the business can sell itself out of just about any problem.

The other approach primarily focuses on effective management of people and processes in order to minimize expenses. Finding more efficient, effective ways to provide the business products and services and doing more with less become the name of the game.

Which is the better approach?

The intent of this article is not to favor one approach to the other. Like most things in life, a balanced approach is best. From time to time, it is important for each business leader to step back and look at his or her organization and assess this balance.

A quick self assessment might suggest that your business should invest more in marketing efforts such as advertising and promotions, yet very little has been invested in training managers and employees in important skills such as time management, planning, teamwork and effective meeting skills - all necessary tools to be operationally effective and efficient.

Consider how much some businesses invest in marketing and public relation activities, compared to how little they invest in efforts to improve the quality and efficiency of products and services, and the effectiveness of employees.

Businesses that have grown rapidly over a short period of time often have significant opportunities to reduce costs and become more operationally effective. In many cases, gains in efficiency and effectiveness can contribute to the bottom line as effectively as a new marketing push.

In fact, it has been calculated that most established businesses have the opportunity to reduce their operating expenses by 20-40 percent by doing their work correctly the first time.

A Cost of Quality assessment can be used to quantify the opportunity in your business. This assessment looks at conformance and nonconformance costs. It quantifies all of the costs associated with ensuring things are done right (cost of conformance) as well as all of the costs that are incurred due to poor quality and other tasks that provide little or no value to customers, employees or shareholders (cost of nonconformance). Nonconformance costs include all errors, waste, rework and returns that are a real part of every business. There are established, proven methods that any business can use to minimize these unnecessary costs.

In most businesses, payroll and related human resource expenses are the single greatest expense. When a business is small, it is relatively easy to manage a lean team. With tens or hundreds of employees, the effectiveness of the management system becomes a much greater factor in influencing productivity and human performance.

In well-managed companies, all employees have a clearly defined job description and an understanding of their goals and objectives aligned with the company's goals and direction. These employees routinely work with their managers to review progress and further their development on the way to achieving these goals. These businesses find they are able to reach financial goals because all employees and job areas are working together, each contributing an appropriate share to the bottom line.

Organizations that find a balance and remain entrepreneurial while establishing effective management systems are poised for success by tackling the profitability equation in the only two ways that count.

Rorie Wilson's firm, BPM International, is a Southwest Florida-based consulting firm that assists organizations in achieving excellence through Total Quality Management and Customer Satisfaction systems.