In business, all profits are costs

March 1, 2006 By    

Profit serves three purposes:

  • It measures the net effectiveness and soundness of a business’s efforts.
  • It is the risk premium that covers the costs of staying in business – replacement, obsolescence, market risk and uncertainty. Seen from this point of view, there is no such thing as profit; there are only the costs of being in business and the costs of staying in business. The task of each business is to adequately provide for these costs of staying in business by earning an adequate profit.
  • Finally, profits ensure the supply of future capital for innovation and expansion, either directly by providing the means of self-financing out of retained earnings, or indirectly by providing sufficient inducement for new outside capital in whatever form is best suited to the enterprise’s objectives.

Implications of this redefinition of profits serve a useful purpose in the measurement of a retail propane company’s performance. The first purpose cited above is how we historically view profits – the excess or what’s left over after we have paid our bills. However, in the second point it may be that the profit is not sufficient to replace capital for worn-out equipment.

Carl Hughes
Carl Hughes

The point is that if a portion of your company’s contribution is not sufficient to cover the costs of replacing aging trucks, you are not covering all of your true costs. Driving past some retail propane plants would suggest that this is often the case.

But the even higher plane of evaluation asks if any aspect of your business provides a return sufficient to stay in business. In other words, does each of your business segments or operations generate sufficient cash to cover operating expenses as historically defined: the replacement of bulk delivery and service fleet as well as other plant upgrades, as necessary, and capital to buy new tanks to support the growth of your business?

If we look closely at what this means for each of our companies, realistically we should all decide to close any business venture if it is not covering the costs required to be in business or the capital required for future growth and to stay in business.

This “all profits are costs” concept was created by Peter F. Drucker, who was considered by many as perhaps the best business mind from the 20th century. His passing last fall ended a 60-year period of prolific writing, consulting and thinking that has had profound impact on managerial sciences in the United States.

When Drucker introduced the term “business strategy” in a 1960’s article, his editors urged him to not use the term “strategy” as it had only been used in military circles and would not be acceptable or understood for use in the business community. Today, the term is not only common but overworked and, quite frankly, often misapplied.

However it’s Drucker’s constant theme of “It’s all about the people” that struck me as relevant to our efforts in the retail propane distribution industry. We uniquely distribute our BTU’s by truck, hose and cylinders with thousands of workers. While trucks and tanks are our essential assets, it is the people of our companies that distinguish one from another. Therefore, success in retail propane is always at the people level.

Drucker has much to say that is relevant to our industry about how we can become more profitable and increase the values of our individual companies. In subsequent months, I will address topics Drucker spent a great deal of thought on, such as how to build an effective management team, how to pick the best people, managing for the future, improved decision making and thoughts on the family business.

All this is geared towards the goal of passing along ideas for you to employ within your organizations and increase the value of your company.

Carl Hughes is vice president of business development for Inergy LP. He can be reached at
Chughes@InergyServices.com
or 816-842-8181.

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