Dr. Bala Balachandran’s 4M Profitability Maximization Framework.

‘#Profit’ is not something that’s computed in the end. It’s something that’s planned in the beginning. The current is considered the era of start-ups, thus facts related to profit and start-ups, help understand the scenario of profitability are as follows startups take 3 to 5 years on average to be profitable, with only 40% of startups actually retaining profitability and later in their time-line 90% fails due to capability to attain profitability before capital runs away.?

The below-stated frameworks by Dr. Bala Balachandran define 4 M with the last ‘M’ of Maximizing Profitability and provided the path to achieving profitability. The Framework can be understood as follows:

‘M’easure Both Revenues and Costs Correctly (Activity-Based Costing (ABC))

To maximize profit, organize should start with a mechanism and setting up of operating procedures to measure both Revenue and Cost, to suit their business scenarios. For instance, to measure a customer’s profitability, an organization should start by calculating the contribution margins (sales revenue less all product-related expenses) for all products sold at the Customer Level( Thus all products separately at each customer level ) and subtract the expenses incurred to sustain that customer ( To evaluate Customer-sustaining expenses they should segregate those expense that is traceable to individual customers but are independent of the volume and mix of purchases). These include the expenses incurred for Client communication (Traveling and calling), developing and maintaining background information on the customer’s operations, markets, credit rating, etc. as per the case of the industry.?

This Analysis gives unique Business Intelligence insights about customer segments and profitability within them. For Example Kanthal, a manufacturer of heating wires analyzed its customer profitability and developed an insight that the well-known 80–20 rule (80% of sales generated by 20% of customers) needs to be adjusted and evaluated further for their business operations. And help develop a follow-up insight that a 20–225 rule was actually operating: 20% of customers were generating 225% of profits. The middle 70% of customers were hovering around the break-even point, and 10% of customers were losing 125% of profits. And this 10% comprise of largest sales volumes.?

The possible wrong costing strategy contributes to these scenarios because large, unprofitable customers demanded lower prices, followed by frequent deliveries of small lots, this requires extensive sales and technical resources, and product changes, which doesn’t suit the organization’s operation strategy. Thus measuring helped in developing inputs to the second “M” of the framework.

‘M’onitor Movement of Both Revenues & Costs.

Organizations should monitor Both Revenues and Cost around the blend of cost drivers. Thus, Monitoring Top-line and, devour Bottom-line, costs with a comparative view of both to apply the 50% Rule.

50% rule implies following cases to Monitor and Manage both Revenue and Cost.

Case 1?: Variable cost > 50% of Revenue

In this case, we should focus on “Cost Management” and thus apply a strategic approach to reduce cost. To prioritize cost components we follow Rule 1: Address components that have the highest portion of Variable cost first then move forward in descending order. This rule of cost management helps address high-contributing elements first.

Case 2?: Variable cost <50% of Revenue

In this case, we should focus on “Revenue Management” and thus apply a strategic approach to increase revenue or generate an additional source of revenue by constantly monitoring costs to comply with rules. To prioritize revenue streams to address we follow Rule 2 ( Cashew nut Rule ): Address revenue streams that generate the lowest revenue and move forward in Ascending order.

The implementation of a core concept of the framework, the 50% Rule, should be applied not only based upon on consolidated statement but at a more granular level. Companies should monitor their Revenue and cost at the customer segment level and apply this rule. Example — Consider ITC’s financial year 2018 consolidated report its total income is 42757.38 Cr. and the Variable cost (for example considered: Raw Material Consumed and other expenses) is 21557.25 Cr. Thus a whole company should follow Cost management. But Considering further granularity sub-category ‘FMCG Cigarette ’ added 52.08% of Gross revenue and 46.52% of Net revenue thus reporting consolidated gross revenue and net revenue of ?22,268 cr. and ?8,220 cr. (considering EBITD 17670.8) in FY-18 require to follow revenue management. Thus Monitoring Revenue and Cost and granular level helps achieve maximum profitability.?

‘M’anage For Action Plan.

Organizations should form an action plan and Manage them to maintain profitability. Followingly, are some of the strategic characteristics that define profitability from individual customers: (1) purchase behavior; (2) delivery policy; (3) accounting procedures; and (4) inventory levels. Planning and managing these characteristics at the customer level helps achieve the path of profitability. For Example, An earlier description of the strategy of Kanthal addressed these characteristics in their planning changing prices, minimum order sizes, and information technology cost allocation thus transforming the customers into strong profit contributors.

Enterprises should consider the ‘Fixed cost’ Perspective and ‘Targeted Segment’ strategy while planning and managing their Revenue and Cost. For Instance, ITC at further granularity sub-category ‘FMCG Others’ (which in this case will include apparel, personal care, education, and stationery, etc.) when analyzed suggest to implies “Cost Management”, but when evaluated ITC shared report it suggests low revenue via apparel segment and consider restructure it. This is because of the ‘Fixed Cost’ perspective, as apparel is a capital-intensive business and requires economy of scale thus we will apply the Revenue management technique.

“Targeted Segment” strategy can be well stated by Kaplan’s (1992) study, which described three types of potentially non-profitable customers who should be retained, thus planning and managing accordingly to organization needs and Targeted segment. These customers are (1) new and growing customers who promise more profitable business in the future; (2) those who provide qualitative learning benefits (rather than financial benefits); and (3) those who are acknowledged as leaders in their market or specialty area.

Further domains that can be considered for planning and framing organization-centric solutions are Yield Management/ Revenue Management, Throughput Management, Activity-Based Management, and Process Value Analysis to attain the 4th “M” of Maximum Profitability.

“Sometimes, if you’ve not failed, you’ve not learnt many lessons. Failure can be a huge lesson to learn.” ― Bala V Balachandran

‘M’aximize Profitability.

Implementing this framework in a cyclic manager will help achieve the path of sustainable “#Maximum #Profitability”.?

“in every step of your journey, your ambitions grow, a step at a time.” ― Bala V Balachandran

About Dr. Bala Balachandran (Conceiver)

Dr. Bala #Balachandran

J.L. Kellogg Distinguished Professor (Emeritus in service) of Accounting and Information Management, Northwestern University - Kellogg School of Management , Illinois, USA.

Founder, Dean, and Chairman, Great Lakes Institute of Management , India Chancellor, Great Lakes International University, Sri City, Andhra Pradesh, India.?

“Your Network Is Your Net Worth.” – Dr. B. Balachandran.?

Blog: https://www.balavbalachandran.com

About Sunmeet Singh Oberoi (Thought insertion / Summarizer)

Sunmeet has a proven track record in Enterprise digital transformations and strategy initiatives. Sunmeet had worked with 塔塔咨询服务公司 in Strategic growth business addressing the industry’s digital solutions present in international geographies. Sunmeet had also worked with different NGOs and as part of his entrepreneur journey had piloted a project to address Tier-2 city problems in India. Currently he is working as a Consultant in ZS Associates.

Twitter : https://twitter.com/SunmeetSingho

Medium : https://medium.com/@sunmeetso