Pursue profits, not revenues

by Dave Anderson

Many business leaders have done an adequate job expanding their organizations in recent years through horizontal growth. They added profit centers or bought new businesses for their portfolio. However, as important as horizontal growth through acquisitions can be to your business, it is often a better indicator of your credit line than your business leadership. A truer test of business acumen is whether or not you can grow your operation vertically: line-by-line increases in gross profit, unit sales, net profit and the like.

Another issue: if you are increasing profits, is it because of real top-line growth, or because you’re better at cost-cutting? There’s no question it’s easier to cut the buck, than expand the bang. To achieve sustainable profits that increase steadily over time, however, you must earn top-line growth. Cost cutting has its place, but too much eventually brings a diminished return.

Frankly, it’s easier to achieve increased revenues via horizontal growth than to grow profits vertically. In fact, it’s a quick-fix for the ego: you show visible signs of growth even though you may have substituted acquisition for execution. Let’s face it: It is more fun to hire extra bodies, add new departments and buy competitors, than exercise daily discipline. But discipline is what it takes to structure your business for maximum profit. The payoff? The creation of a profit structure that positions you to chase horizontal revenues and expand your business from firmer ground.

Here are four reasons why the constant pursuit of acquisitions can hurt your  business.

1. Acquisitions can distract you. They take your focus away from building your core business. Acquisitions are also seductive. It’s far more exciting to “do a deal” than to dig deep and build your current business.

2. Acquisitions make you vulnerable. Relying on acquisitions for growth, without a strong profit structure, leads to thinly spread resources. Consequently -- one bad move, two bad months or paying too much for a new entity  -- leaves little margin for error. The resulting financial squeeze can become a hangman’s noose.

3. Acquisitions tempt you to chase revenues over profits. The old mantra, “we’ll lose money on each unit, but make it up on volume” is an excuse for failure to execute and a financial death wish without a solid profit structure. The problem is that without a profit base for your business, additional revenues vanish through the sieve of a foundation built on sand. While it’s possible to have both revenues and profits, I prefer pursuing profits first. True profits are created by virtue of a sensible expense structure, sound systems with controls, and a mindset to act on opportunities. These “virtues” are the lifeblood of business. Once you have them you can then venture into sensible acquisitions. But a profit structure must come first.

4. Acquisitions can dilute your talent pool. Unless you have a strong bench of leaders you’ve developed, acquisitions overtax your talent, jeopardizing that which made the acquisition possible in the first place.

Some argue that cash flow is more vital than profits. However, without sound accounting practices, the ability to turn inventories fast and fund finance contracts quickly while tightening up receivables, your incoming cash flow quickly disappears.

Let’s be frank: It’s time for some business people to stop playing J.R. Ewing. They need to get back to growing their business vertically, before their horizontal empire turns into a quagmire. To buy another business temporarily takes the pressure off the need to maximize your current assets and opportunities. There will, however, come a day of reckoning. It usually arrives at the worst time and seems to come out of nowhere, even though it has gradually built up a head of steam over time. Suddenly your failed discipline, loose systems, loss of focus, depletion of resources, absent accountability and inability to grow others begins to manifest itself in the form of a plateau, a gradual decline or a total loss.

Here are four tips to strengthen your profit structure and position your business for maximum returns. Once this structure is in place, you’ll have the financial fuel to chase revenues through acquisition and expand horizontally, creating sustainable growth and long-term financial vitality for your businesses.

1. Instill financial discipline and tighten cash flow procedures.  It’s not what you make; it’s what you keep that counts. If there is one area in your business where it is appropriate to micromanage, it’s financial systems and controls. Maintain sensible inventories and turn them quickly. Collect receivables, control expenses, remain right-sized and the like. Set clear expectations for results in each of these areas and meticulously manage the details necessary to optimize them.

2. Create systems and mindsets that maximize opportunities and assets. Most businesses don’t need additional opportunities. They need to maximize the ones they waste every day for better results. For example, incoming sales calls and your present customer base. In most businesses the management of both is beyond sloppy; it is atrocious.

3. Managers must grow their teams vertically, rather than horizontally. The truest measure of a manager is whether or not they improve and develop their people. When most managers want to increase sales, they hire more people, rather than develop the ones they have. This “hire three more guys” mentality presupposes that existing employees are maxed out. Hiring more people rather than making current employees better is not effective leadership; it’s surrender. The trench warfare mentality — throw bodies at the problem and maybe we’ll get results — is as weak as it gets. Hold your managers more personally responsible for the individual improvement of each person on their team. If they can’t get people consistently and measurably better, either train your managers, demote them, or fire them and get some real help.

4. Begin an acceleration pool of upcoming talent. To pursue vertical growth or horizontal growth, staff new profit centers or new acquisitions, you need to start building a bench. A bench is an acceleration pool of talent, and it needs to be in place before the need arises. Every growing organization needs a mentoring program that identifies and cultivates new talent. Until you begin to develop leaders at all levels in your organization, you cannot sustain vertical growth, much less think about acquisitions.

Take a second look at your growth strategy and determine if you’ve been seduced by acquisition and expansion. Maybe it’s time to get back to the basics of sound business. Are you structured for maximum profit? Are you building a bench? If not, what are you waiting for?

back to top                               back to Web exclusives archives