The question about Profit

The Profit Question

I was pondering over a point that how can we measure Profit. Is it clients? or is it the turnover? Well friends one of the prime objectives of starting any business is to make profit. If you are not sure or if you don’t know whether you are making profit or not, I think you have defeated the purpose of starting that business. If your intention is not to make profit are you running a charity?

Anyway coming back to the topic, How will we come to know if the company is making profit or not? If company says we have got high-profile clients, does it necessarily mean that the company is making profit? If a company says we have got an outstanding brand, does it necessarily mean that the company is making profit? What if you find out that the company has got motivated employees? The walk in together, they walk out together. They take lunch breaks together. They eat together. They even kill themselves together. Well what I mean is they go out for smoke breaks together. Does it necessarily mean that the company is making profit? What if the company directors are millionaires? Does it tell, whether company is making profit or not? How about the company that operates in prime location? Does it necessarily mean that the company is making profit?

Friends, none of these can be used as a yard stick to know if a company is making profit or not. Only way or the most effective way to know that a company is making profit or not is by simply preparing basic financial statements and reading and understanding it.

Core of Finance Management – Profit or Bottom Line

Profit

The core of finance management is the ability of every employee in the organization to understand the impact of every decision they make; and to take only those actions that will strengthen the Bottom Line.

If you think your decision has the power to affect the Bottom Line of your organization, then you are a Finance Person. Many non-finance managers, they think they are not finance person. Wrong!

For example let us say a salesman wants to sell a pen for $10 and he approaches a potential client and says Sir, this is the best pen in the world and we are selling it for $10.And the customer would say well that is a very good pen, I am sure I will need it but I need 100 pens but my budget is only $800. This means the salesman has to decide whether to sell the pen for $8 or say no to the deal. The decision the salesman is going to make is not a salesman’s decision. It is a finance decision.

When an HR manager is being approached by an employee for a promotion, a hike in salary or for bonus the decision the HR manager is going to take is not going to be just an HR managers’ decision. It is going to be a finance decision, because if she decides to give bonus and increment the salary then it is going to impact the Bottom Line of that organization.

When the Admin manager is asked – How much stationary do you want for the next financial quarter? If she has got already much stationary lying in the cupboard and still she goes and orders more it is going to affect the Bottom Line of the organization. If she knows how stringently they should be using the stationeries and cut down on printing and paper and other small things, it is definitely going to have a positive impact on the Bottom Line. So those decisions are not just Admin Managers’ decisions. They are finance decisions.

When the management asks the Warehouse Manager – How much inventory do you need for the next month or next financial quarter? This will depend on how much they have in the inventory and how much they can sell by coordinating with the Sales Manager. Finally the Warehouse manager will come up with a number. The number he is going to come up with is not just a Warehouse manager’s decision. It is a finance decision. If he goes on and orders more stock than it is required then money will be lying in form of inventory or stock in the warehouse.

Let us take example of retail. If a particular shirt is not been sold for some time and the Retail Manager decides to put a tag 10%, 20% or 50% discount. The Retail Manager is not just taking a Retail Manager’s decision. He or She is taking a finance decision.

What I am trying to say here is, if you think your decision has got the ability to impact the Bottom Line of your organization, and then you are a finance person. It is a common mistake that people do by thinking that only accountant and book-keepers are responsible for taking finance decisions. In fact even in large organizations people think finance decision is the responsibility of finance department. But what actually happens in the finance department is just the book-keeping and accounting.