To increase profitability, distributors should rethink their approach to accounting. This practice –the first step in a four-step process – means knowing the difference between financial accounting and management control, says Jonathan Byrnes, senior lecturer at MIT and author of Islands of Profit in a Sea of Red Ink, in Four Barriers to Distributor Profitability.
Hurdles that prohibit or slow a company’s ability to raise profits do not develop overnight, Byrnes said.
“It’s a legacy of a major change in the nature of the era of business that we’re in that’s happened in the past 20 or 30 years,” he said. The history of business from the 1900s to today reveals the key avenue by which companies became successful was economies of scale, something that Byrnes argues is no longer as important as it was in the past.
Financial accounting, which is meant to report aggregate results of the company to shareholders, is an accurate and venerable discipline for companies, but it shouldn’t be the way management determines how to allocate business to increase profits.
Rather, discovering profitability via management control should be done by profit mapping, he said, a method of running a two- to three-month income statement on every account or product within a company to a 70 percent accuracy level.
Read about overcoming the other hurdles to raise profits in Four Barriers to Distributor Profitability.