Back to the Future – Getting back to profitability

"Wait a minute, Doc. Are you telling me you built a time machine...out of a Delorean?"

In Back to the Future, Michael J Fox ./ Marty McFly expresses great surprise that Doc Emmet Brown has built a time machine from a widely derided US sports car - the DMC Delorean. The use of a Delorean was a piece of visual humour, shot to amuse the audience with the idea that such a badly engineered car could become a time machine with the addition of a flux capacitor (and by reaching 88 mph). However it worked, and time travel was performed - successfully!

What does this have to do with corporate management for businesses conscious of the need to raise investment in the not-so-distant future?

The answer lies in the behaviours which investors fall back on in times of stress. The 1980s (as well as being a golden age for cinema) were also a period of economic stress. Under stress, investors return to focusing on the businesses they determine to be the lowest risk, and in this case, comfort is given by those businesses which can demonstrate ample cash flow, well-controlled costs and a demonstrated ability to show where within their business profit is being achieved.

This represents a big shift for modern businesses; the last 20 years have come to be dominated by challenger tech businesses, whose rapid rise and increased investor appetite for high-growth enterprises can outline a runway to incredible revenue growth.

As a result, many businesses now struggle to control their organizations, cannot allocate costs to where they are used/consumed and fail to understand the true drivers of profitability within the business.

Where has this cost been spent, and what was the result? Is this product or product line profitable? Will spending more on this product generate greater sales but decrease profitability?

Due to the focus on revenue growth, for many businesses, financial systems have not been set up with a focus on measuring cost & profitability at the levels now needed. Often profitability is a calculation done offline, based on allocation logic which changes each time the analysis is created and potentially manipulated to serve internal interests or the politics of an organization.

The question for business leaders now is whether they rip up their existing ERP landscape to rebuild with profitability management a major focus (at great cost) or if they find other ways to achieve the level of consistency/accuracy needed to make these decisions.

Read the write up following the Financial Focus discussion HERE

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