Habits of Profitability Every CEO Should Know

Reaching and exceeding market average for your company’s value is the goal of many CEO’s. Perfecting the methodology employed in day-to-day decision making will help business owners gain control, increase business value, and achieve profits that are in the top percentile of their industry.

Before outlining best-practice methodology, it is crucial to understand the profitability averages for your industry. Struggle to increase profit can be a factor of the market you inhabit, or an indicator that different practices will adjust (and improve) the company’s value. Once benchmark data is known then there is a clear understanding of where to apply the most effort.

A case study will best illustrate the point. A construction company Foresight CFO recently worked with averaged 1.4 to 2.0% profitability year over year, producing little cash for financing growth. The average profitability for the construction industry is 10%; thus, the business was leaving an 8% profit gap on the table. In this industry, each dollar of profit is expected to increase business value by 3.5 to 6.1 times.

Since this particular company was underperforming, continued investment in new markets and personnel required the owner to use his home as collateral for a bank loan. Yet, this might not have been necessary. Establishing the following profit habits turned things around:

• Identify P&L Managers beyond the owner
• Start Monthly P&L Meetings to Calibrate Operational Game Plans with the Numbers
• Build a 12-Month Budget Profit Model with “What-If” Scenarios to determine the best path
• Add Actual to Budget variance analysis to the monthly P&L
• Use Peer Benchmarks to Define the Top Percentile and breakthrough status quo thinking
• Reforecast two or three times a year by updating the budget profit model to look forward the next 12 months; this is a Rolling 12-Month Forecast

Employing the six practices above will embed financial management into day-to-day decision making. Once firmly established, these habits will allow CEO’s to confidently choose between various growth options, take a comprehensive approach to numbers-based decision making, and lead objectives to completion while achieving world-class profitability for your industry.

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