Sunday, March 6, 2016

The Ultimate Sin in Business to be unprofitable.

Sure, you'd say, that's your CFO "pedigree" talking, there must be larger sins than this.

So hear me out.

A bottom line (the profit) is easily dismissed as an accounting convention. Cash is king - they say. And it's true! But this accounting convention was not invented for the purpose of distracting cash-minded managers from what really matters. Profit is a long-term indication of a business's ability to turn out positive cash flow. Fail to deliver that and your cash-rich days will be over - sooner than you think.

So, beyond Finance 101, a red bottom line signals a dysfunctional business model. Persisting losses in a business lead to an accumulation of damages to the organization that become increasingly difficult to course-correct:

- the mindset of the organization moves from "who's building what" to "who's avoiding the next layoff round", which leads to high amount of unproductive political actions (lies, deceit, backstabbing) and to a very clear negative selection of personnel - only the weak ones (or whose only skill is organizational survival) are left, since the good ones are more likely to be hunted out of the organization;
- the increasing negative pressure for immediate results, coupled with a weakening control environment and a rationalization of what's acceptable to do in a chronically ill organization will lead to corruption, red tape and other forms of non-compliant behavior;
- beyond people, the asset base (tangible and intangible) will be eroded from lack of proper care and will continue to lose its capacity to accrue economic benefits to the business;
- there is an erosion of creditworthiness as well, which leads initially to higher costs from the supplier base (as everyone prices in the business's inability to pay on time), up to the breaking point of credit default and insolvency.

Some people may push some valid counter-examples, like start-ups - they are not yet profitable. But this may be not because of a dysfunctional business model:
1/ a start-up is a vehicle in search of a valid business model so they may not have found it yet;
2/ or its business model only gets validated at a certain scale

And of course, there's the unicorns, which are heavily-funded start-ups that are expected to prove their business model (and win big) at huge scales. But these are not yet businesses, they are just more sophisticated bets. Extremely few of them pay off big, some of them earn some money back, most of them nothing at all - isn't that the definition of a bet?

Throughout my career as a CFO, I have long been an enemy of waste - not surprisingly, my start-up actively works with visionary entrepreneurs and business leaders in fixing their most important waste baskets (inefficient and manual business processes, ossified enterprise landscapes). The results and the initial take off are amazing.

So isn't an unprofitable business model, just simply, the biggest form of waste? All the money thrown away, all the human talent drain, all the assets blown to pieces?

I believe so, but then how do we repent from this sinful behavior? :-)

There is no universal recipe, but the biggest building blocks are
1/ gain visibility over your waste baskets (how's your controlling, by the way?),
2/ fix the easiest/biggest waste baskets first (which may very well mean scaling back)

and then

3/ gradually heal your business model by putting in place the right people, processes and systems.

Sounds like standard economics textbook? You'd be surprised how few businesses go past step no 2/.

The secret to a sustainable, profitable business is execute 3/ every day so that you don't need to execute 1/ and 2/ every now and then.

Which could probably get translated as more righteous living leads to less repentance :-)

More to come...

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