Relatively Solvent
Bleeding Much More Slowly
A manufacturing client had a large contracting arm that won very large jobs and, too often, lost very large amounts on one job or another. While the revenues were huge and the company’s profile soared with high-profile contracts, the service side of the business made investors just a bit skittish.
The head of the business unit developed a new plan to build both the level and consistency of profitability and presented it to the management team. Everyone seemed to be climbing on board until the new CFO added his perspective. Yes, he said, the new plan would raise profitability, if it worked. However, even in the best case presented by the unit’s chief, the returns would be lower than the company’s cost of capital.
Which brings us to the topic of swapping dollars, burning money and wasting time with no hope of real returns. Figuring out the total costs of operating any business unit, identifying the connected revenues or profits that flow from that unit’s operations and assessing the real opportunity for sustainability are much more challenging than those business school exercises would suggest.
Still, it’s worth the effort every so often to assess the real contribution of each product line or business segment to profitability and sustainability. Profitability can be tough to measure, especially when costs of capital and contributions to other segments are considered, but it is still worth doing.
Measuring sustainability—the connection between the product/service/activity and customer recruitment/retention—is a good starting point here. If the activity isn’t having a real impact on customer relationships, the other points might be irrelevant over the long term.