Measuring Profits

Metrics that are just superficial

Search for the metic to measure profits was into the third month and I still could not settle on a all weather metric. I could feel the pressure to fall on me. So, I changed my approach to find a some good metric, implement it and iterate it from there on. So we picked up monthly profit, profit per client, profit per work hour as metrics to measure the profits. These metrics was that they were a good measure of profit, but Murugan came up with complaints that they are not useful at management. Bhavadharani too joined the complaints saying they are extremely empirical and not proactive.

The metrics were informative to understand what has happened but not good enough to stop what mistake that was going to happen. It didn’t help on increasing our profits or smoothening work for the same profits. Failure after failure to come up with a good solution made me understand that I was getting better and better towards the right metrics. We went on to exhaust all the metrics related to profits but there was no better use. We became clear that its not gross profit, net profit, super profit, profit per hour, profit per second — its nothing to do with profits. All the failures told us to look into anything that does not have “profits”.

One more thing became very clear to us that a good metric for measuring profits is not be the profits but the factors that affect the profits.

Prefect solution that cannot be measured

Once we understood that profits in business has more to do with how we handle our expenses over anything else it was quite easy to the factors that affect profits. I broadly classified the expenses into operations, administration and marketing expenses. Then I started to see how to have a metric control over each of them and used all the traditional approaches standards costing, marginal costing and activity based costing and they helped me to understand the fundamental idea behind cost controls is to think “twice before a rupee is spent”.

Within couple of hours of finding this idea, I found a major flaw. That evening I was about to buy a car parking ticket and I ensured to think twice before paying. First thought is to buy connivence and save time by parking in a paid zone. The second thought is to save this money choose free parking zone at the cost of working walking couple of minutes in heat and apart from struggling to find the free slots. A quick cost-benefit analysis helped me to take the decision. Then I realized the flaw — Will I be able to measure every time whether I gave a second thought before I spend? Will everyone in the team be able to measure this behavior every other time?

If ever this behavior can be measured, it can happen only by tracking the on a daily journal “whether you have thought twice before spending?” and accumulate all the responses of the vertical heads and analyze how many times they have not thought about it before spending. Using this data gradually train them to lower that frequency to zero — rather it becomes a habit not to spend without giving a second thought. However, from my daily journal writing experience I know this will soon fail, even before they get this into an habit. Also, it was not foolproof as people can cook up the facts saying I spent in the best of their diligent thinking and end up spilling the money into the gutter.

Measuring the unmeasurable

Smart solution to make “thinking twice before spending” as a habit is to create an environment that will force this habit. Build a system that will ensure the environment is measurable. By measuring the environment, we will be able manage the environment and there in able to get better profits.

Challenges right before us was to find out that suitable environment. For finding out this environment, I only had to walk into my dad’s office and see deeply how his office works. He had a made a rag to riches business and know hard work and his financial discipline made him so I decided to pick up some valuable clues back to out office. He operated on a simple principle — keep a “neck to neck” reserve for the day’s expenses from daily collections and remitted the rest into the bank account. A question arose in me whether he was was stingy. He was never with us at family, but he might be with his workforce as he operated his business from a very normal office. When I started moving with his office people a little more I was surprised to find they had a industry plus play and about one third of his team are with him for 20 to 40 years. This assured me he was not stingy, but diligent on what will be needed for that day.

Now that were sure on the environment we needed to duplicate in our office and work culture, but we needed to make some critical changes as dad’s business was one-man show in a town, but we are the modern business with more vertical leads in multiple locations. We introduced a process of differentiating expenses into two:

First category of expenses are the once that happened repeatedly and we had nothing much to do with it. We only needed to assess these on monthly basis if there is anything we can do to reduce it. Our IT hosting bills Heroku gets due every month and we keep a tab on it. Similarly is our support hub rental, telephone and internet bills. Not much work to be done on this and we named it “rolling budget”.

Second category of expenses are the once that a connection with a new project and we had everything to do with these costs. If we are diligent and pay attention to details we can easily save up to 50% of the cost, in other words if we are not diligent we can end up losing 50% of our money to someone else and that will be the price for not paying attention to details. This is were the “thinking twice before spending” habit is super useful and we named it “project budget”. We decided to create a support hub at home town so that it will generate more employment back home and cost effective compared to Bengaluru, Chennai or Hyderabad and half of the savings can be passed to our customers. We set a budget of 1 million rupees for a 10 people ultra luxury support centre with a build up area of 1,000 square feet. I took on this project in my hand as I had home advantage to execute it and at the same time test if the “project budget” works.

We created a budgetary constraint of three level sanction for spending even one rupee on it. Also, I made restriction on the project budget — took half the budget and keep it aside. I decided to play within that what I had. This forced me to execute the project at the lowest price for highest output. I had to hunt for options after options to reduce the cost and maintaining the output I expected. I enquired with twelve carpenters and picked up one of them. But was not happy with the price they said for for work tables. I went ahead with a corporate refurbishment merchant and got hold a elegant, cream, heavy, U-curved, 4 by 3 work table, with file cabinet and foot rest at a dream price of 20% of the market value. I started playing within my means and I kept on staying away from half of the budget meant for it. Every other expenses was diligently spent and I kept shaving off the extra cost with finding a superior alternative.

Miscorsoft’s “Code complete” book was helpful in executing the construction. The book emphasis to devote on a good planning and understand that labour is the costliest part of construction and not materials. On the project timeline, I invested 7 days on design planning, made the vertical heads to drop in and took inputs from them and corrected the design flaws .It took another 15 days on procurement planning assembles the right workforce. Order the what to work on after what and then started the work. It took only 10 days at work.

I kept inviting friends to our new office and we got a standard voice, “you guys have the best office in the town” and after a while “can I refer my relative son (daughter) to your office.” There was one one common statement “you should have spent a bomb on this.” That’s it. We knew we have got the best output and even before we did out recruitment drive we were too sure that our support workforce is going to love their work place and most importantly they will have the pride to tell their circle they have the best working atmosphere in the whole of the town!

Though, I knew what the cost spent on it. I waited for the monthly report to come out and show off with the other vertical heads — It was 197,659 rupees! 20% of the project budget.

Cheat sheet on how to replicate this:

  1. Do you feel that you need to measure your profits?

If yes, go ahead with finding the factors that affect it. If no, you can skip to the next cheat sheet!

2. Do you have a monthly expenses budget?

If yes, break it that into “rolling budget” and “project budget”. If no, go ahead to prepare one.

3. Do you review monthly rolling budget?

If yes, break it that into “rolling budget” and “project budget”. If no, go ahead to prepare one.

4. Do you do a cost- benefit analysis before ticking on a project?

If yes, you are right on the project budget. If no, do this and rest of the project budget is automatic.

5. Do you have approval authorities for project budget?

If yes, well, good and prefect. If no, its better to create it right away.

6. Do you create a mental constraint to stay away from half of the budget?

If yes, you are always own the game. If no, time to do it.

One rupee saved is not always equal to one rupee earned. Every rupee saved comes from forgoing some sort of convenience or extra effort. When we come up with creating that constraint to stay away we should be clear whether its worth the saving, else we will become stingy and mess up with management.

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