Getting back to profitability

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Is it time to talk about making returns?

As various changes brought about by the global Covid-19 pandemic become the new normal, I am going to hazard a guess about business owners, which is that for the last few months most have not thought much about making returns on investments. Their focus has been on survival – and who can blame them?

Many businesses, smaller ones in particular, may have already gone under, or will not survive in the near future. So, what is the point of discussing profitability? Because if businesses do not try to make returns, they will not survive for too long. That is just the nature of the beast.

You invest in a business to make returns, which are required for multiple heads. These include reinvesting in growth, taking care of employees, improving the quality of the business and of course paying the shareholder reasonable returns that only a well-managed business can bring. Business owners who cannot do all this for an extended, sustained period may be better off investing their energies elsewhere. 

Granted that the pandemic period and its aftermath – which is yet to be fully played out – has been a black swan event unlike anything most of us have seen in our lives. As the catastrophe unfolded, there’s bitter-sweet satisfaction in knowing that I was among the first to advise people to be patient, to hold on to whatever they have, especially cash, and look for new and different business models to counter the impact of the pandemic. 

For whoever was listening then, it is important now to start considering profitability and plan to return to some level of it in the next six months or so. As the global economy reopens, including Pakistan’s, we are going to be looking at a very different market from the one that went into limbo a few months back.

So exactly what can people do to get back to profitability in this changed world?

To start with, consider the threat level to your business. A lot of businesses I know are having existential problems, but they need to be careful in determining the threat level from every aspect of the business. Not every issue they face is an existential one. 

The biggest source of existential threat is obviously the loss of revenues. In my opinion, while a reduction in revenue of 10-20% for a few months may be a liquidity and profitability issue, a reduction in revenue of over 25% for 6 months is a serious existential threat to any business. 

Unfortunately, the pandemic has caused many businesses to be in the latter situation. These organizations need to make serious changes to jumpstart revenues. The goal should be to push sales through quick initiatives which may be temporary but will yield results. They should adapt their pricing structure to the conditions of the market and offer selective discounts where possible. Businesses will need to focus on the most profitable sales channels. 

In this situation, data and analytics become even more important, particularly for consumer-facing businesses. The business-to-business companies will need to go a few steps further in trying to understand the business fundamentals of their customers. This when they will be asked for delayed payments, lower prices and higher inventories, all of which require significant operational adjustments. 

The key aspect to watch out for is the difference between short term issues versus longer term trends. It’s the long-term trends, which may have been emerging even before the crisis and have become amplified in the current scenario, that will continue to challenge businesses. A good way to spot these is to look for the underlying causes of the current issues. 

For example, it was always difficult for many technology-based businesses which emerged in the last few years to make good returns in Pakistan. These include ride sharing, food delivery, and online shopping – all successful in building revenues in a limited and extremely price sensitive market. Primarily for these reasons, though without any publicly available data to verify this, I suspect they have always struggled for returns. 

Similarly, the sweat shop manufacturing business model of supplying “fast” ready-to-wear fashion garments to international brands has always been based on the cheap labor abundantly available in various countries – until these countries achieve a level of prosperity which makes them more expensive. This labor arbitrage business model has moved from Europe to North America to China and Asia and is now increasingly shifting to even cheaper markets in Africa. Devoid of any pricing power, producers of fast fashion have been hit with fundamental changes in demand in the western world. Many of these businesses will require a business model transformation they may not be prepared for.

Other than sales, management teams need to look towards entire supply chains to determine where there is potential to save and create value. The pandemic may have provided businesses an opportunity to introspect in times of zero growth. With careful planning and once again eyes on longer-term solutions, there should be potential to improve profitability in each and every function – from R&D and finance, to purchasing and production. 

Depending on the company, the market, and the competitive landscape, top management should develop key performance indicators for every function that will contribute to the return to profitability. This does not mean applying the same remedy to all problems. The classic mistake here is laying off employees in the same ratio across the organization. In fact, laying off employees should be the last resort and when done, it needs to be planned and executed with as little pain as possible. 

Timing is critical in achieving results. Not everything can be started at the same time, as this is likely to result in a dilution of efforts and ambiguous outcomes. Leadership teams should establish priorities and drive outcomes in key areas. 

It is better to prioritize initiatives according to three simple criteria: profit potential, impact timing and ease of implementation. In times of crisis, these basic and “hard” criteria are much more effective than considering “softer” criteria like culture and strategy. This is not to imply that the latter are less important, but in these difficult times they will have to give way. However, there is a need to exercise caution in order to avoid longer term damage to culture and strategy.

Finally, despite everyone’s best efforts, some businesses unfortunately may not survive. This is hard to digest, especially for business owners who have built something with their blood, sweat and tears. As difficult as this may be, if a business continues to remain unprofitable for a long time, it is time to rethink. 

Successful entrepreneurs are those who continue to make unstinting efforts in new ventures despite having to shut shop in previous endeavors. This is an unfortunate social dilemma mostly prevalent in our country – the stigma of failure and reluctance to talk openly and honestly about these experiences, even in situations like a global pandemic, when business owners are hardly at fault. 

In fact, I consider failure as the biggest teacher and salute anyone who has tried and keeps trying. It is during times of adversity that the most valuable learning takes place. Those who are struggling may find some comfort in the realization that somewhere along the line, their efforts will pay dividends.

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