Why Low Profit Has Become Pandemic

  • by Tom Stimson

Originally published in the March 2011 edition of The Stimson Group’s AV Matters newsletter.

In the February 2011 issue of Building Connections the official newsletter of NSCA, Chuck Wilson penned an insightful letter to his members. The title says it all, "Ten Reasons You're Not Profitable, and 10 Ways to Change That." Chuck's audience is integrators and contractors, but this list applies to all of my readers (and probably more so to Rental-Stagers). Read on to learn why.
In his article, Chuck has captured the contrast between managers that blame the world around them for changing the rules of the game and those that see change coming and respond to it.

He begins by listing ten qualities he sees in companies that struggle with profitability. There's a consistent pattern of justifying the status quo through isolationist posturing and self-denial. What has happened - in a nutshell - is that the microeconomic factors that affect our industry have changed and many, many companies either did not recognize the shift or didn't respond appropriately.

I work with a lot of companies and the most difficult attitude to overcome is "If we don't drop our price, we won't win the job." When I ask, what's the bottom limit to price? No one seems to know the answer, or how to consistently calculate it. We live in a price-driven world, but I like to remind my clients that they are not negotiating price, they are negotiating profit. Managers must understand where the profit comes from, so they can tell the sales folks what the lowest acceptable profit is. At the end of the day, it doesn't matter what other companies are willing to charge; you need to sell at a profit. Unfortunately, too many of the businesses in our industry either don't have the data to analyze or do not understand what their numbers are telling them.

Benchmarking is an excellent way to uncover clues about how to manage your business, which is Chuck's point. However, if your data is not properly collected then you will benchmark the wrong numbers and draw the wrong conclusions. For example, managers often focus on gross profit by job or month. In my experience of reviewing scores of AV industry financial statements, I have not found two companies that measure gross profit in exactly the same way. Benchmarking works best when you analyze related sets of data (I feel another article coming on....). This is not necessarily intuitive and is why outside advisors (accountants, bankers, consultants) are important for your business.

Moving on to the qualities that fit the positive side of Chuck's list, we see more than just the flip side where proactive companies follow metrics, benchmark, and walk away from bad business. Chuck describes a culture where managers are involved in decision-making, financial terms are mission-critical, and strategic thinking is applied. However, adapting the practices in the "profitable" list aren't necessarily enough if your assumptions are wrong.

Which brings me to Chuck's final teaching point about the observation that big companies get their price advantage from buying more product. He's right; they do not. Big companies may buy products for less than smaller competitors, but in general their costs and overhead are lower as a percentage of revenue because at some point "scale" kicks in. When you realize that you can do twice as much business with the same overhead costs, why wouldn't you take timely projects at lower margins? In other words, every opportunity needs to be evaluated based on timing, strategy, and potential profit together.

The best business decisions do not follow straightforward rules. Managers should be guided by a matrix of variables that lead to the best decision at this moment. That decision is why managers exist.

In my opinion, the reason lack of profitability has become pandemic is that the industry in general focuses too much on the outside factors that explain current conditions and not enough on the internal response to those circumstances. The basic rules for running a good business have not changed: Know your costs, balance your resources, and differentiate your services. What has changed is the margin for error. The lesson from Chuck's insightful article is in essence, that companies are in charge of their destinies, the tools for better decisions are available, and poor profits are a lagging indicator of poor management.

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