How to create high profitability E-Book

Ingemar Fredriksson

• Herausgeber: Ingemar Fredriksson
• Kategorie: Fachliteratur
• Serie: A Few Percent More
• Sprache: Englisch

Seitenzahl: 308

Veröffentlichungsjahr: 2020

Beschreibung

“Profitability development” could just as well be the title of this book. It takes a completely new perspective on economics, focusing on how the four foundations of profitability can be utilized to increase the profitability in a company. The primary advantage of the model introduced is its simplicity, making it easy to involve everyone in the company when using it. This is important since the author has a profound conviction, based on decades in management, that the most important factor for creating success is to involve your entire staff. To do so, you need to be able to discuss complicated economic terminology (like leverage, NPV, WACC etc.) in a simple way. The book provides that simplicity and it contains plenty of practical, real life examples of how significantly increased profitability can be achieved with simple measures. This is explained with reference to different industries where the model has been used. In today’s business with global competition, it is high time for a new profession, “profitability developers”, to replace business developers. This book offers all the tools necessary to succeed in that profession.

INGEMAR FREDRIKSSON has 30+ years’ experience in top management, business development, profitability development and marketing. He has worked with plenty of SMEs in different industries and also with Fnatic, IKEA, Invest Sweden, Miss Sweden and the Swedish government. He has also been vice chairman of The Swedish Federation of Business Owners. Since a few years back, he lives and works in the UAE. All four books by Ingemar Fredriksson, in their original Swedish edition, have featured on top lists together with names like Steve Jobs, Daniel Kahneman, Thomas Piketty, Sun Tzu and even the Fifty shades-series. Search on YouTube for “Ingemar Fredriksson’s books – Bestsellers for 15 years!” for a full video of random list positions over the years.

Leseprobe

“Profitability development” could just as well be the title of this book. It takes a completely new perspective on economics, focusing on how the four foundations of profitability can be utilized to increase the profitability in a company. The primary advantage of the model introduced is its simplicity, making it easy to involve everyone in the company when using it. This is important since the author has a profound conviction, based on decades in management, that the most important factor for creating success is to involve your entire staff. To do so, you need to be able to discuss complicated economic terminology (like leverage, NPV, WACC etc.) in a simple way. The book provides that simplicity and it contains plenty of practical, real life examples of how significantly increased profitability can be achieved with simple measures. This is explained with reference to different industries where the model has been used. In today’s business with global competition, it is high time for a new profession, “profitability developers”, to replace business developers. This book offers all the tools necessary to succeed in that profession.

INGEMAR FREDRIKSSON has 30+ years’ experience in top management, business development, profitability development and marketing. He has worked with plenty of SMEs in different industries and also with Fnatic, IKEA, Invest Sweden, Miss Sweden and the Swedish government. He has also been vice chairman of The Swedish Federation of Business Owners. Since a few years back, he lives and works in the UAE. All four books by Ingemar Fredriksson, in their original Swedish edition, have featured on top lists together with names like Steve Jobs, Daniel Kahneman, Thomas Piketty, Sun Tzu and even the Fifty shades-series. Search on YouTube for “Ingemar Fredriksson’s books – Bestsellers for 15 years!” for a full video of random list positions over the years.

Other books by Ingemar Fredriksson in English:

Trouble with staff attitudes and commitment?A handbook for how you get everyone to contribute towards good results.

Chinese Tourists – What do they want?Facts, ideas, and succesful examples.

Make me not meProduct stories as sales driver and identity builder

All four books, including the one you are holding, by Ingemar Fredriksson, in their original Swedish edition, have featured on top lists together with names like Steve Jobs, Daniel Kahneman, Thomas Pi-ketty, Sun Tzu and even the Fifty shades-series. Search on YouTube for “Ingemar Fredriksson’s books – Bestsellers for 15 years!” for full video of random list positions over the years.

First editionDesign cover: Senti ABCopyright Ingemar Fredriksson www.procentforlaget.seTranslation: Deane GoltermannISBN: 978-91-984366-4-8

Excerpt articleEconomicInfo 2012

Review of the management book How to create high profitability? by Ingemar Fredriksson.

The book is unique, as it has a completely new approach to how these issues are created. It differs from the large number of management books that are characterized by a complicated terminology, where the reader gets caught up in various concepts that are difficult to use in practice. This book is written for action people, who want direct answers to what should be done, what has been done wrong and can be corrected, with reality as a background.

The book that I had the opportunity to review will be published this spring and is written by Ingemar Fredriksson who, in addition to a management consultant and author of more books, is also the second vice chairman of The Swedish Federation of Business Owners. The publisher is ProcentFörlaget.

The most important thing is that he has practical experience from many leading positions in the business world. He describes directly from everyday life how these thoughts have developed. I have read a lot of management books, but few have appealed to me in the simplicity of being able to use the advice, here we now have one of the few exceptions.

Lage Wikstrand, Authorised Accounting Consultant

Are there entertaining books about economics?!

One does not expect an economics book to give rise to delighted smiles or pure laughter - but here it is! Between painting examples from reality, complicated economic concepts that the author manages to bring to life with simpler words and economic models that everyone can understand and use in their own companies, small and large, you get an insight into how fun it can be with numbers. The visualizations are like a charm! The book is hard to put down; easy to read, sometimes a bit philosophical and so wonderfully liberating written without cues. A book to return to to remind oneself to “think new”. I have recommended the book to other business acquaintances and they are as delighted and overwhelmed as I am. There were many laughs, so sure there is now an entertaining book about economics!

Leila Wallén, Owner, Bookkeeping company

Thank you for the model!

A useful book that explains terms and has simple applicable models that are very useful in everyday life. This book will be on the desk for a long time.

Rolf Borås, Owner, Construction company

Spot on!

An extremely valuable insight explained in a simple way. I will buy this book for everyone at the company so that we can all have common goals and an understanding of why you should get up in the morning and go to work.

Raymond Victorin, Sales manager, International media conglomerate

Low investment - high return.

In my job as CEO of a small company (35 employees), I have had many aha experiences from reading this book. The fact that the author often goes outside the “box” and at the same time explains in a pedagogical way makes the information understandable and applicable in your own business. I highly recommend it because it is so useful to constantly remind yourself of these obvious things as well as activities that you have not thought of.

Mårtan Glas, CEO, Manufacturing company

Medicine for the recession

Right now, almost all companies, small and large, are struggling to cope with the recession. Too many people stare blindly at staff reductions and relocation of production abroad before examining the possibilities of increasing profitability here at home. Here, Ingemar Fredriksson’s book “How high profitability is created” can really come in handy, both in the boardroom and “on the floor”. The book has both a unique structure for profitability work and contains a number of concrete tips. Ingemar generously shares his own experiences, both successes and setbacks. The language is simple (sometimes almost too simple) and difficult things are explained in an easily accessible way. My assessment is that there are few companies that could NOT increase their profitability by reading and applying this book. Buy it! Use it! Make your business (even more) profitable!

Per Florén, Economic developer, public sector

How to create high profitability

The four foundations of profitability

Foreword

How do you know?

“Do you have any experience from our industry?”

This is by far the most common question I get when first arriving at a company as a consultant. It always reminds me of an early assignment I had undertaken for a contracting business that asked me for help to go over their QM system. Certainly, I had been involved in introducing ISO 9000, but then my role was in higher management, so I therefore did not really have experience with the details of what to do with a quality management system. I did not disclose this to my new customer, and instead told them the assignment would not be a problem for me. I had no problem with it either, because as I started digging into the details of their problems with the system, I quickly found that many of their difficulties were the usual suspects – poor internal communication, lack of discipline in reporting nonconformities, and so on. Almost everyone has seen these same issues, whether they have ever set foot in a contracting firm or not. This is not about my own capabilities, but it is a good illustration of what I have experienced in company after company – they are all unique, and you have to respect every new industry. However, many times they still show greater similarities than differences.

I relate this here to encourage you, as a reader of this book, not to place too much weight on whether you see the examples we discuss here as relevant to your company or industry. See them for what they are; examples. Accept that it would be practically impossible (and particularly tedious) to have examples from every single industry. Instead, try to keep from dismissing any of these examples, thinking you cannot use them in just your industry. Rather, look for anything in these examples that you can use, and earn greater returns on your investment in buying this book. Learning from others’ experiences constructively is very much like solving problems. You can do this best by staying more open and creative – as in this little story:

A ship was passing through the Panama Canal during WW2 when they came across something particularly unwelcome. Luckily, ships pass through the canal at low speeds, so they caught sight of this problem well in advance. There was a mine blocking their path ahead. The crew knew they could not stop the ship in time, and they were quickly discussing intensely what they could do to handle the threat. Someone suggested the entire crew should stand along the railing to blow on the mine and move it to the side. The canal was pretty narrow, but there should be space. This kind of offthe -wall idea is easy to dismiss as crazy, but in this case, it led to another idea. Everyone understood that blowing on the mine would not do, but someone figured out you could actually move the mine carefully by spraying water at it. Fire hoses were quickly deployed, and with great care and precision, the crew succeed in pushing the mine into the narrow space between the ship’s hull, and the side of the canal. After passing the mine, they notified the authorities who could disarm it.

This is a very good example of how one idea can lead to another. Even if that idea or solution will not work for you in a specific situation, it can still lead to another that does actually work. All you need is to keep an open mind, tinged with a touch of creativity.

The hope here is that you, the reader, will understand the book in this way. The examples we provide are not the solution for every company, but the aim is to provide inspiration and ideas that readers can work with, and use to find a few percent more that contributes to your company’s long-term survival and its ability to grow.

As explained in my first books, I believe the best way to create many percentage points of profitability is to increase it a few percent here and a few more there. You rarely find a large control handwheel you can turn to create high profitability. Sure, some companies can get good profitability from a single individual’s single -minded focus on cost consciousness. This is not always possible, and as a professional profitability developer, it is more important to be able to access the whole toolbox for growing profitability, and to know how each tool can be used. After all, in most companies this does involve diligently turning many small knobs to improve profitability by:

A few percent lower (buying) costs;

A few percent in better prices;

A few percent in selling products or services with better margins;

A few percent in improved efficiency; and much more.

We provide many examples in the book of how this can be done while introducing the four foundations of profitability and a new perspective on managerial economics. Quite simply, this is a book for inspiration that you can use in any industry or in any position you hold in your company. This book can also provide inspiration for consultants in their work on a variety of assignments. Often, hiring a consultant is a good way to drive change processes.

One effect of continually increasing competition, mostly from globalisation, is the huge importance that everyone on the team, more than ever, contributes to profitability. It is no longer enough that only managers understand how this can be done. Now, every employee in the company needs to know this. With simple and easily understandable models, this book can become a powerful tool in helping everybody in the organisation. Then, with the examples discussed, the book and its models can involve everyone in contributing to improving profitability.

The book is also appropriate for anyone wanting to learn how to improve profitability in any business and does not require significant academic understanding in the subject of economics.

This is because the book provides a simple model as reference for anyone working to increase company profitability. The reader will also learn from many practical examples on how to accomplish this. In addition to these more concrete examples, the readers will gain an understanding of many basic concepts that economists often use. However, we will explain them from a slightly new perspective which everyone in the company, not just those in the finance department, can use in their daily work activities.

“Economics is extremely useful as a form of employment for economists...”

J.K. Galbraith

A new perspective on business administration

This is not a book about business administration. It is a book about how to create a sound economic basis in a company. In practice though, this means how you create high profitability. You could also say this book is about profitability economics rather than managerial economics, but that could easily become an entirely too complicated approach. Instead, we can simply discuss various perspectives on running a business. This is the first book to systematically go through how you can increase profitability based on its four foundations.

I was struck by the thought that standard business administration literature and schooling most often did not look at how to create high profitability when I was taking a course at the Stockholm School of Economics called The company’s economy. I took the course because I had always felt slightly unsure about the field of business finance, despite a solid background in being able to generate positive results in a variety of businesses. Sure, I had studied university level business administration, and it was part of my degree program for Market Economy. I had also worked in a practical capacity with this for many years. Still, I had this sense that I had not completely understood the business finance aspects of the field. As the course progressed, I came to understand that this was not really the case. This insight provided the basis for this book – it all revolves around the perspective you take in approaching the subject.

After several lectures in the course, I realised you could take three different perspectives to approach the subject of business finance: the accounting perspective, the analytic, and the profitability developing perspectives.

The likely, most common approach is the accounting perspective, which is also the approach that involves traditional finance functions at every company. This involves recording revenues and costs and also preparing income statements and balance sheets in compliance with applicable regulatory frameworks. Within the concept of this perspective, you will also find an element of the analytical perspective.

The analytical perspective involves learning how to value a company in various ways. Professions with the most use of this perspective include business brokers, stockbrokers, market analysts, and specific banking staff, as well as other financial market analysts, stakeholders, and private investors. The analytical perspective is used in attempting to interpret a company’s financial reports and the company’s operations to gain an understanding of its value (which in turn, relates to share value and other similarities). Often this involves concentrating on trying to assess the company’s future value. The analytical perspective can also be used to assess the company’s value for acquisition or merger. However, it was the profitability developing perspective that I thought was missing almost entirely from this course in managerial economics, and in all the courses I had previously taken. When I raised this issue during that course, several others agreed. These were people like me, in company roles involving business development, rather than in finance – one was a CEO, some were sales or marketing managers, and so on. The common denominator for all these people was they held more operative responsibility in maintaining or improving their companies’ profitability. Certainly, having a basic understanding of the accounting or analytical perspective is useful, but these offer little help for anyone with primary responsibility to improve their company’s profitability.

  I would say that the accounting or analytical perspectives offer rather limited possibilities for driving a company’s positive development. Still, I can fully understand that these are what most traditional business programs concentrate on, since the majority of those taking these courses will end up working in company finance departments, or in the banking and finance sector. That is naturally where the accounting and the analytical perspectives can offer significant value. However, for everyone responsible for influencing a company’s profitability positively, it is the profitability developing perspective that is most interesting. Which is what this book is all about: How to create high profitability.

To be able to embrace the profitability developing perspective, we must start with partially abandoning the most common way to approach the subject of business finance (regardless of whether the accounting or analytical perspectives are used). Typically, you start by learning the numerous terms and how various items in the financial statements relate to each other. This is otherwise the common, though hardly stimulating, way to teach the other subjects.

But this book is written for a larger audience, outside of those wanting to learn only academics-based business finance. It is primarily written for people working in operative roles that include responsibility for positively influencing company profitability (economics). It is also for everyone who, in any way, can use a more comprehensive understanding of how any company’s long-term capability to survive (that is, its profitability) can be created and affected by various factors. Practically speaking, this means the entire staff at the company. With this in mind, I present the subject in the book, in simple and easily accessible terms, to make it as practically useful as can be. To help the largest possible audience be able to tap into the contents of the book, certain chapters will explain some of the more basic terms and relationships. I fully understand that anyone with a more indepth knowledge of business finances, and is only interested in this new perspective, may find these chapters somewhat oversimplified. I will ask for their understanding and indulgence. Be sure to note that these simplified presentations, at times, provide introduction to a discussion of how companies can work more efficiently. I hope and believe, that even those with more learning and longer experience with the subject will find examples and inspiration on how they can also increase profitability in their own operations, in various ways.

The four foundations of profitability

The four foundations of profitability are:

1.---Revenues

2.---Costs

3.---Assets

4.---Financing

Everyone in a company should understand and remember these and how they all relate to each other. An easy trick is to think of these four foundations as your Main navigation menu1, whenever you are working with the issue of company finance.

The best would be to try to forget all traditional ways of dealing with the subject and simply concentrate on the four foundations. That way you will always have your eye on the right things. Also, you will approach the subject from the perspective that promotes profitability. When considering any proposal or change, you should ask in which way this relates to any of these four foundations. Does the planned action mean increased revenues, lower costs, reduced asset mass, or impacting the financing of total assets positively?

If you think so, then you should ask yourself to what extent you expect this will be. How much will your revenues increase? How will costs decrease? How much will your assets shrink, or how will the change bring more advantageous financing? If you are unable to give a concrete answer to these questions, you should take it as a red flag demanding very serious consideration. There are certainly highly experienced businesspeople (not to mention economists) who think this model is entirely too simple, and that it does not add anything new. The response to these objections is that part of the newness brought by this model is precisely its simplicity. After all, models do not get better because they are more complicated, right? This simplicity allows everyone to understand what factors can impact and drive profitability. It also offers several simple questions that can be useful for any experienced businessperson. Much in corporate life actually gets done without anyone asking these critical questions. Things get done because a particular authority in the organisation suggested it, or because the competitors are doing it. Things get done because people believe customers want it. This happens naturally, along with many other things because people honestly believe these will be positive for their company. Still, if you cannot relate your action to any of the four foundations of profitability, you should take a critical look at what you are planning. This applies to both small decisions like purchasing a product or service, and larger, complex business transactions like acquisitions or mergers. If you cannot calculate the effects, then how can you be sure they will be positive for the company? I have personally been involved with million- dollar investments, acquisitions, and decisions to enter new markets that would have not been likely made if we had critically asked these questions; Will it contribute to increasing revenues? And if so, by how much? Will this have disproportionally negative impact on costs? Will the decision contribute to cutting costs? And if so, by how much? Will the decision change our total assets in a way that improves returns?

How can we finance the decision, and what impact will the various financing options have on return? Sometimes performing this analysis can lead to the conclusion to actually execute the action, but in a different way. As in the example from the group where I worked before. We decided to enter the U.K. market with a separate, wholly owned company and staff from day one. This decision cost us many millions during the first years of operation and brought particularly modest revenues. That investment should reasonably have been implemented differently, not started with our own premises, local CEO, administrative staff, and all. A travelling seller could have done the job from our home office, or why not just an address and phone number at a serviced office, while marketing with sellers from the main offices?

This is only one of many examples of how decisions can be made that are not necessarily wrong but fail to contribute to profitability in the best possible way – simply because you did not ask yourself a few simple questions.

Most of the concepts used by economists do relate in some way to these four foundations, and so understanding them always lets you find the main menu, and to ask the right questions – even if you are not a trained economist. Anyone with the least experience in traditional business administration can see that what is described above is usually found in the income statement and statement of financial position2. Nothing more than the financial reporting, with key performance indicators, are most often used to monitor and follow up the company’s developments. As the model relates to these traditional terms, we will provide brief descriptions of them here. If you are fully familiar with these and the terms in the next chapter, feel free to skip forward.

The income statement is the table presentation of company revenues, followed by costs, and ends with the bottom line – profit or loss (which is nothing more than revenues minus costs). This table can be made in two ways – formatted by the nature of the expense (based on cost category) or by function (based on the function of the expense).

Anyone with a stricter view may, perhaps, want to emphasise profit as being a foundation of profitability. However, as we see here, this is simply a consequence of the amount of revenues and costs where it cannot be directly controlled, making it uninteresting for the profitability developer. Profit (and loss) is simply the consequence of two other items. What is interesting therefore is how you can impact revenues and how you control costs.

The statement of financial position (or balance sheet) presents the company’s assets (machinery, buildings, inventory, and trade receivables) and how these are financed. Appropriately enough, assets are presented under this heading, and how these are financed is shown by the liabilities and equity items. Both Assets, and Liabilities/Equity shall be equal, which was why it is sometimes called the balance sheet.

Profitability, return on investment, return, profit, and results

Business finance, like every other subject, has its own special terminology. What can be confusing is that some concepts have several different terms for them. For example, profitability (as you would expect) relates to how profitable something is. To assess this, you have to compare one item in relation to another. A common variant of this is comparing profit/loss in relation to the company’s total sales (or turnover) to arrive at a specific ratio. If a company has ten million in total sales and earns one million, you can say the company has a profitability of ten percent (highly simplified, but we will get to the details soon). Unfortunately, this does not say enough about company performance, as you also need to know how much money (or capital) has been tied up to earn that one million. That is how much, in liabilities and equity3, was required to finance the assets needed to run the business. Was this 10 million or 100 million? When you compare company profit to this figure, you get what we call return on investment, or simply return.

Return on investment, as the term implies, involves the interest you gain from the capital invested in the company, and return is a word for the same thing; how much the capital in the company provides in return.

The example of one million in profit means that you get a return oninvestment/return of ten percent if the tied-up capital is 10 million, and one percent if this is 100 million. This interest can then be compared to what you could expect to get from investing your capital elsewhere. Therefore, these concepts are important for whoever, is financing the company’s operations – the owners, banks, suppliers, and similar bodies (suppliers can indirectly finance operations through various types of financial solutions, such as for machinery).

Thus, profitability is sometimes used as a synonym for the size of the profit or results (which are naturally two words for the same thing) and is sometimes used as a synonym for the concepts of return on investment, and return.

So profitability is, much like return on investment and return, more of a general concept rather than a specific term. To make these terms meaningful, you need to further define them in terms of what they refer to: profitability in relation to total sales, return on investment of equity, and so on.

To complicate things even more, these can be calculated in different ways, depending on what you want to know. If you want to know whether a business is profitable regardless of how it is financed, you look to results before expenses from financing activities, which is usually referred to as operating results (why be satisfied with a single concept?). If you want to know how much return you get on the money you contributed as the owner, you would likely want to see return on equity, and so on. However, we are not here for a complete review of all these terms, you get this easily enough in the many traditional business administration books available. Instead, we are here to concentrate on learning how to create high profitability based on a basic understanding of the structure of financial reporting, and by establishing a profitability developing perspective.

Whether high or low, profitability for different companies is usually determined by comparing with other companies in the same industry. However, this is not really interesting to the profitability developer, since our primary task is to continually look for ways to improve profitability.

Contribution margin, contribution margin ratio, margins, and markup are a few concepts that are important to get familiar with, and which are often used to describe profitability for a product or service. These can also be used to describe profitability for a specific group or department within a company. So, let us begin with markup and margins, since these are the basis for a costing sheet. After calculating the production costs or purchase costs, markup is added to cover your overhead, risk, and profit for your company. Margin is what you call the markup when it is calculated as a percentage of the entire price:

Margin is also seen as the contribution margin when stated in currency units, and the contribution margin ratio when stated as percent (where the above example shows 33%). When you work with optimising profitability, it is important not to be blinded by any single product’s contribution margin ratio. More importantly, concentrate on the contribution margin you can earn. You can earn greater total profit by selling more units of a product, despite having somewhat lower contribution margin, than by selling a few units of a product with very high contribution margin.

Therefore, looking only at the four foundations of profitability, business development largely involves the four simple questions mentioned before;

In practice, this is not naturally quite so simple. Certain companies cannot take actions in any of these areas, or it may not be relevant. They may simply ignore the advice and actions exemplified here. However, we will warn you not to give up too easily and, for example, simply state that customers in your industry will not pay more. I personally worked in an industry where the claim that raising prices was not possible, more or less became a self-fulfilling prophecy. Then, this was shown to be incorrect. Further ahead, we will also describe how a printer was able to increase their profitability through simple means. That is also an industry having difficulty with profitability, and where many complain about difficulties with charging enough.

The rest of this book will provide you with many examples of how you can improve profitability with each and every of the four foundations of profitability, in any company, but in different ways. The majority involve revenues and expenses, since the other two (assets and their financing) have more to do with the prerequisites for operating at all and so involve significantly fewer operative decisions that impact revenues and expenses.

1 The main menu on a website, or, where you always go to as starting point whenever you feel you have gotten lost.

2 Also known as Profit and Loss account (P&L) and Balance sheet (BS).

3 Equity is in practice also a liability, but it is owed to the sharehold.

The first foundation:

1.0 Revenues1

Approaching revenues with the right attitude is important if you want to be able to optimise revenues well. You must understand that you have the right to charge enough, and that you sometimes have an obligation to charge a lot.

Early in my business career, like many others, I had a hard time charging enough. It felt dishonest to accept payments of more than what I felt was necessary. The problem, as I will explain further in this book, was simply that determining what a reasonable payment is can be very difficult. Nearly all companies have a mix of good, average, and bad deals. If you are overly concerned with accepting only what you find reasonable, chances are that you make only a mix of average and bad deals, which we can see in the examples presented below.

Let us start by looking at a more positive example of how a company’s profitability can be supported by a mix of different deals. Assume an average profitability for 50 percent of your deals, a good profitability for 25 percent of it, and a bad profitability for the remaining 25 percent of the deals – with a turnover of 100. Also assume that an average profit margin (CM) is five percent, and a bad deal gets zero percent profitability. Furthermore, assume the good ones earn ten percent, which is shown in the table below: