Wednesday, May 14, 2008

How Much Profitability Do You Need?

How much profit do you really need to make?  You only have so much energy and time.  While the idea of making as much profit as possible sounds great, the reality is life's full of trade-offs.  In the world of business, you need to know your minimum profitability to meet your objectives.  This helps you identify realistic goals and make more effective trade-offs.  In The Essential Drucker: The Best of Sixty Years of Peter Drucker's Essential Writings on Management, Peter Drucker, writes about identifying minimum profitability.

Plan for Minimum Profitability Over Profit Maximization
Drucker recommends planning for minimum profitability:

… How much profitability do we need?  To attain any of the objectives entails high risks.  It requires effort, and that means cost.  Profit is, therefore, needed to pay for attainment of the objectives of the business.  Profit is a condition of survival.  It is the cost of the future, the cost of staying in business.  A business that obtains enough profit to satisfy its objectives in the key areas is a business that has the means of survival.  A business that falls short of the profitability demands made by its key objectives is a marginal and endangered business.  Profit planning is necessary.  But it is planning for a needed minimum profitability rather than for that meaningless shibboleth “profit maximization.”  The minimum needed may well turn out to be a good deal higher than the profit goals of many companies, let alone their actual profit costs.

Key Take Aways
I think we make better choices when we're aware of a specific goal versus "as much as possible."  Here's my key take aways:

  • Know the minimum profitability you need to survive.
  • Know that the minimum might to meet your objectives might actually be higher than you expected.