Criticial Finance Issues: Financial Times Briefing

CR ITIC AL F INAN CIAL ISS UES

18

Profit improvement

Profit improvement, like liquidity, can mean different things to different people but

it represents powerful concepts that relate strongly to the prospects of any busi-

ness. There are two approaches: one is the mainstream business approach that

sits on accounting foundations and is fundamentally about analysing costs and

ratios in order to reduce costs; the other is represented by disciplined techniques

for improving business processes and thereby reducing costs and improving prof-

its. Both are mainly directed at costs, which identifies them as a critical financial

issue, and are not about strategic choices, marketing or business policy.

The accounting approach

The first approach to profit improvement, the classic accounting approach,

selects key cost ratios and compares these over time, and against peers and

competitors. It drills down to the components of those indicators in order to iden-

tify or obtain clues to operational changes that can improve profitability. Most

businesses will start with gross margin and then look at its components such

as property costs, labour costs, materials costs, etc. to see which might be

addressed to create more profit.

As Director of IT at Dillons Bookshops, a 150-strong retail chain, a simple

review of the accounts showed me immediately that the largest single area

of costs was equipment – its ratio to sales stood out. It was therefore

obvious that to make any worthwhile impact on costs this was the area to

concentrate on first. In turn, the two largest ratios within this were leasing costs and

Stakeholders refers to all those who have an interest in the business,

what it does and how it performs. This interest is very wide; it includes:

executives and other employees who earn their living from the business;

customers whom it provides with goods and services; suppliers who earn their

living from it; and also the wider community that charges taxes, provides services

and is affected by what the business does. Shareholders are also stakeholders.

Shareholders are the legal owners of companies. The whole so-called ‘Anglo-

Saxon’ approach to business is to think in terms of maximising their investment and

it is believed that, in doing so, the other stakeholders, such as executives, other

employees, customers and suppliers, also automatically benefit. Whilst this is true,

it is also more complicated. Employees will often recognise the utility of working

hard to maximise shareholder value while also promoting their own interests. At

times there may even be clear and open conflict between the two ideas.